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Is There a Safe Way to Invest? Yes, Actually There Is

When considering investing your money you want an option that is going to be safe. But at the same time you want to make money, to have a return. That leaves two options: the savings account and the CD. A savings account, while giving you anytime access, generally has a lower interest rate. Whereas a CD, despite not allowing anytime access, you can have a better interest rate. And a better interest rate means more money for you.

Once you have decided on a CD, you give a large deposit of money to the bank or institution for a fixed amount of time at a predetermined interest rate. The principal behind a CD is that you are allowing the financial institution to use your money and they pay you interest for using your money. But this is also why withdrawals against CDs, generally, are not done. The penalty for drawing against a CD will range from losing several months of interest to closure of the CD; withdrawing from a CD should only be done if you have no other options available. Otherwise, once you have opened your CD, your money accumulates interest, and you will receive that interest plus your deposit back at the end of the term of the CD. Terms on CDs can be three, six, or nine months, or one to five years.

The aspect that makes CDs safe is that they are insured up to $250,000 by the FDIC, or the NCUA in the case of a credit union. This is not like the stock market in which you can not only lose any money you make but also your investment as well if the market makes a downward turn. With a CD you do not have the fear that you will lose your money. This is what makes a CD a safer but higher yield investment than a savings account.

Below you find the questions you need to ask when looking for a CD and also different types of CDs.

Questions to Ask

When will I get paid?

Since a CD is to make you money, you will want to ask when and how the interest will be paid to you. In some cases the interest may be deposited into your checking account, a check may be issued, or the money can be reinvested in the CD.

What happens when the time is up?

The institution that you have your CD with usually contacts you before the term is up to find out what you would like to do with your investment. You may choose to reinvest it, or to close the CD and withdraw your money and interest. By mindful that some institutions may try to automatically rollover into a new CD. To avoid this keep an eye on your CD: know when you term is up; if the institution does not contact you, contact them; be sure of the terms of your CD, check what conditions they have for when the CD matures.

What does callable mean?

Callable is when the institution can close your CD and return your money before the CD has matured.

How much of my CD is insured?

As long as the total amount you have at any one institution is no greater than $250,000 then all of your investment is insured. For example, if you have $248,000 at your current bank, and you want to invest $3,000, you will want to look for CDs at other institutions so that all of your money is insured. In another example, let’s say you have only $150,000 at your current bank, and you are only going to be investing $2,000, then you would be insured if you invested at your current bank if they have the best CD option to suit your needs. Remember, as long as the total amount you have at a single financial institution does not exceed $250,000 your money is insured.

Different Types of CDs

There are other CDs available that might yield a higher return for you or whose terms are a better match to your lifestyle. Always make sure you research the terms and conditions of any CD you are thinking of investing in before you deposit your money.

Add On CD:

This is a CD that gives you a bit of flexibility if you are hesitant to invest all the money you desire at once. Say you have $2,000 you want to invest. Initially you only want to open a CD with $1,500, but you would like the option of adding the remaining $500 at a later date. Consider looking at Add On CDs because they will allow you to make deposits after the CD has been opened. This CD is available for both direct deposit and variable rate CDs, however, check the terms and conditions carefully as there may be certain restrictions that apply to the amount or number of deposits, or to the interest rate.

Brokered CD:

A Brokered CD is one in which you do not own the entire CD. Instead a brokerage firm collects investments from various investors to use to open a CD with a larger deposit; think of it as you only own par of the pie, not all of it. The advantage to a Brokered CD is that the interest rate is generally higher than rates offered on a direct deposit CD. There are disadvantages too. The FDIC will only insure up to $100,000 per investor, so you will have to be mindful that you are not investing more than that to make sure that all of your money is insured. Also check what institution they well be investing at. If they are investing at an institution in which you already have $250,000 placed, look elsewhere because the FDIC will only cover the $250,000 you already have placed; any other money invested, whether through a Brokered CD or otherwise, will not be insured. It will also take longer, in the event of a bank failure, for the FDIC to pay on a claim from a Brokered CD; what could be a week to receive your claim on a direct deposit CD claim could be up to two months on a Brokered CD claim. Also in the event of a bank failure, your return can be effected. A direct deposit CD will generally be allowed to mature at the original interest rate. Whereas the interest being paid on a Brokered CD will usually stop.

Bump Up CD:

This is an option to be on the look-out for. In a Bump Up CD, the institution will allow you to have the interest rate of your CD raised. The good thing about having this option is that the amount of money you can earn through the interest rate will increase. However, the length of your CD will not change, but at least for the last part of your term your CD will be making you more money.

Liquid CD:

This type of CD allows for some flexibility, and, during current economic conditions, might be the middle ground that you are looking for. This is the one CD that will allow you to make a withdrawal without penalty. However, there are likely to be limits to how much you can withdraw and how many times you can make a withdrawal. It is always best to make sure you have a complete understanding of those withdrawal terms before opening your CD.

Step Up or Step Down CD:

You’ve heard of credit cards that allow you a lower interest rate for a set period of time, after which, the interest rate goes up to the predetermined regular amount? This is similar to how a Step Up or Step Down CD works. The example above would be an example of a Step Up CD, in which the interest rate starts lower and then rises to a predetermined rate. A Step Down CD is one that works in an opposite manner; the interest rate starts start at a higher point, and then after a fixed time, drops down to a predetermined rate.

Variable Rate CDs (or Indexed CDs):

These CDs are tied to the stock market in some manner, usually by the Prime Rate, Dow Jones, or Consumer Price Index. This is as close to the stock market that you can come and still be safe. At the end of your CD’s term you will get the amount you invested back. However, the amount of interest you receive is determined by the difference between the stock value at the time you opened the CD and when it reached maturity. If there was an increase of 5% then you will make 5% on your investment. Conversely, if there was a decrease then you haven’t made anything extra, but at least you will be getting your original investment back.

Whenever looking to invest in a CD think not only of how much money you want to make but of your lifestyle as well. You want a CD that is going to work for you and your life, rather than add complications. If you want a CD for the higher interest rate but want to be able to withdraw from it, check into Liquid CDs. If you want the possibility of a larger return look for a Brokered CD. If you are just getting started with investing, perhaps stick with a basic three or six month direct deposit CD, and see how you like it; this way you will make some money without your original amount being tied up for a long period of time. No matter what type of CD you are looking for always check the terms and conditions before depositing your money. If you fail to do so you might end up having to make withdrawals and the penalty could make the difference between making money and just tying up your money for a fixed period of time.

Every two weeks I check in on the CD situation, and every fortnight I am freshly disappointed with the whole state of affairs. Savers are having a very tough time of it right now. CD ladders have historically been considered a top way to invest in certificates of deposit. A normal CD ladder involves a process through which one takes a matured CD and rolls it into a long-term certificate at the best-possible rate of interest. Many committed savers stick to five-year CDs, because these have always offered the very best rates of return. Today’s environment, however (in which rates are in the gutter and even five-year CD rates are barely worth the time and trouble), has seen some savers bumping up to seven or ten year CDs in order to maximize their interest in tough times.

December has brought both good news and bad news for those who have been despairing of the record-low CD rate in the past few years. On one hand, the top CD rates haven’t changed in the past six weeks – yay, no more plummets! On the other hand, the top CD rates haven’t changed in the past six weeks. Boo for stagnation.

CD rates are still in the gutter, and with no sign of making a comeback any time in the near future. If anything, interest rates are continuing to fall, chipping away at the micro-fractions of a percent that savers might be able to scrounge out of their certificates. According to K. Steven Lovell, lecturer of economics and finance at University of Texas Pan American, senior citizens continue to be hardest-hit by the interest rate lull. Those who live on a fixed income rely strongly on the dividends from their savings, and CDs just aren’t the safest bet right now for those living this lifestyle. What can seniors do to make money on their savings if their historical standby, CDs, just aren’t cutting the mustard?

Many consumers probably thought it a victory when Bank of America rescinded their decision to charge a five-dollar-a-month fee on consumer checking accounts connected to an ATM card. Many Americans, however, don’t realize how many banks are upping their fees nowadays, in the wake of banking reform and a number of legislative changes that have made things much less hospitable to profits. The reason they don’t realize it? Banks are being super-stealthy with these changes, knowing how unpopular they will be with customers.

South Florida is a mecca for senior citizens. The balmy year-round summer sun warms their bones, and the laid-back social climate suits the retiree crowd just fine. Unfortunately, economic conditions have conspired in the past few years to rain on seniors’ relaxing and sun-drenched retirements. Many older Americans chose to invest at least part of their savings in certificates of deposit, a decision that they are coming to regret. Rates have been sagging for years, and endless months of next-to-zero returns are taking a serious toll on the nest eggs of these citizens. CDs have long been popular with seniors, thanks to their federally-guaranteed protection of assets. Consequently, the downward trend is taking a big bite out of many South Florida seniors’ incomes.

The Fed announced recently that, in response to continue threats to economic recovery, it would extend low interest rates for another two years. For Americans, this news is a mixed blessing. The Federal Reserve, which was admittedly divided on the subject of consumer interest rates, determined that the economy is weak enough to warrant a continuation of rates close to zero percent. Additionally, the Fed set a “target rate” that banks follow closely when setting the “federal-funds rate” they charge each other for overnight loans as well as the competitive interest rates they charge consumers and businesses.

Good things in life come to those who maintain good relationships. In the business world, it’s just a fact. One’s interpersonal skills are just as important – if not more so – than one’s smarts, head for business, or ability to speak several languages. For banks, relationships are as important as they are to the rest of us. Historically, faithful customers of a bank has always received better services and more favorable terms on their banking products. Lately, it seems like banks are getting more overt and generous in this category, allowing customers with standing relationships to get better rates on CDs.

If you have a decent amount of money tucked away in savings, you might be getting to think about investing it. After all, even the best savings accounts out there are pretty dismal in terms of the return that you can expect to get on your money. That is, of course, because savings accounts put your money at no risk. In the world of finance, risk = money. The higher the risk, the higher the potential return. The surer you can be in the safety of your money, the lower the interest rate. It’s just a fact. CDs are a good choice for those who want their money to be very safe, but eschew savings accounts. A certificate of deposit is a pretty simple investment for even the most novice of savers, but there is slightly more to buying one than just comparing the interest rates.

If you are feeling fed-up with CDs, you are far from the only one. The past several months have seen interest rates on certificates of deposit hit all-time lows. For savers in 2011, it just has not been a pretty picture. Even the best CD rates are less than two and a half percent on average… and that’s for a bond that will tie up your money for five years! If you go with a bond that won’t tie you down for the long-term, you are looking at a payout of less than one percent. The CD situation is so bad that many savers are now shying away from these bonds entirely. Of course, savers need an alternative by which to invest their money! That’s why, today, many consumers are turning their attention to a new crop of low-risk investments. These investments take what people like about CDs – deposit limits of a quarter-million dollars and FDIC insurance – and add a slight improvement to the return rates.

It sucks to be a CD saver right now. How many times have I written that same exact sentence in the last three years? (The answer is: approximately umpteen.) As time marches on, savers are being continually insulted by the record-low interest rates on certificates of deposit. Nowadays, it is perfectly common to receive only a fraction of a percent in interest for the privilege of parking your money with a bank for anywhere from several months to a few years. The American consumer base has largely responded to terrible CD rates by cutting back on buying these bonds. I assume that people are sticking with savings accounts, or simply hiding their money in a coffee can somewhere. For those who are sticking with the CD game, the wrath of the banks has produced a new hurdle: higher penalties for pulling money out early.