Posts tagged traditional cd
Building a CD Ladder: It’s Easy and Effective
Aug 1st
The CD ladder is a type of investment that can provide you with solid interest rates and superior liquidity when compared to a traditional CD. Here are the basics of the CD ladder and how you can implement one for yourself.
CD Ladder
A CD ladder is essentially a group of CDs that you purchase in a staggered manner. The certificate of deposit is a type of investment that allows you to deposit a certain amount of money with a financial institution and receive a guaranteed amount of interest. With a traditional CD, you cannot take money out of it before it matures unless you want to pay a penalty.
With a CD ladder, you are going to purchase CDs with varying dates until maturity. For example, you will purchase a CD that matures in 3 months, one that matures in 6 months, one that mature is in 9 months, and then one that matures in a year. By doing this, you are always going to have a CD that is maturing. You could even set them up to mature even more frequently than that. You could purchase 12 different CDs so that one is maturing every single month.
Increased Liquidity
One of the primary advantages of this approach is that you are going to be able to increase the liquidity of your investments. When you put all your money into one CD, you are going to have to wait until it matures to get your money. If something comes up in the meantime, you will either have to find another source of money or cash out your CD early. If you have to cash out your CD early, it is going to negate the point of having a CD in the first place. It will eliminate all of the interest that you have accumulated up until this point in many cases.
With a CD ladder, you are not going to have to worry about cashing in your CDs. Instead, you are going to have one that is maturing within the near future. This means that you will not have to worry about paying any penalties and you will always have some cash becoming available when you need it.
Emergency Savings
This type of investment is a good way to invest your emergency savings. If you had to put your emergency savings into a single CD, this could cause problems. If you lost your job, you would have to cash out the CD and take the penalty. However, you can structure a CD ladder so that you will not have to worry about this problem.
For example, you could take the amount of money that you would need to cover one month’s expenses and put it into a 90 day CD. The next month, you could do the same thing, and the next month you could do it again. This way, you have money that is becoming available every month.
Certificates of Deposit with Options
Jun 3rd
Certificates of deposit (CDs) come with options, so make sure that you find out what features are available on the certificates of deposit before you put your money on the table. In light of what most economic experts expect to be an increasing interest rate environment, financial advisors may not suggest that you invest money in a certificate of deposit that ties it up in a low interest rate environment. Instead, inquire about bump-up certificates of deposit, which offer a feature where you can opt to accept a higher interest rate on the certificates of deposit you hold when and if the rate does increase.
Advantages and Disadvantages
Advantages to bump-up certificates of deposit are plenty. First, they allow you to invest your money into a safe and conservative investment. Second, the option to bump-up your interest rate prohibits you from tying up your money in a low-return investment. In other words, it allows you to take advantage of a higher interest rate than where you started. Having permission to upgrade your interest rate may seem too good to be true, but it is a reality with a bump-up CD. With the good, however, come some drawbacks. First, a bump-up CD typically starts with a lower interest rate than traditional certificates of deposit. Second, you typically can only upgrade your rate once over the term of the CD. As is the case with most certificates of deposit, if you make an early withdrawal from a bump-up CD, you will have to pay some steep penalties for doing so.
Considerations
The major consideration when deciding between a traditional CD and a bump-up CD is what the expectation is for interest rates. If interest rates are expected to rise, then a bump-up CD may be the way to go. Second, consider the period you have left in the certificates of deposit before you exercise your bump-up option. For example, if you have three years left on your CD and you can bump up the rate half a point, then this is more beneficial than a one point bump-up a few months before the CD matures. As investments go, bump-up certificates of deposit are considered to be one of the safest. These certificates of deposit are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 at each institution that holds your CDs (up to $1 million if you participate in the Certificates of Deposit Account Registry Service, CDARS). In addition, if interest rates increase you can take advantage of the move and if interest rates fall, you receive the original rate. It’s a win-win.
The ABC’s of CD’s
May 8th
The ABCs of CDs
What are CDs?
CDs- Certificates of Deposit- are fixed-income investments issued by banks and other lenders, and insured by the FDIC up to $100,000 ($250,000 on retirement accounts).
Here’s how it works: You give the bank a fixed amount of money for a fixed term. The bank gives you the principal, plus a fixed amount of interest. When the term expires, you receive your principal and accumulated interest. Unfortunately, you are responsible for paying taxes on the interest you earn.
Types of CDs
Once you decide to purchase a CD, you have to decide which type of CD to buy. There are several CDs you can choose from:
Traditional CD: A traditional CD is the old standby. You choose a fixed amount of money that is invested for a preset term and interest rate.
Bump-up CD: Afraid of rising interest rates? A bump-up CD allows you a one-time option to bump up your interest rate. Let’s say you purchased a three-year CD and then a year into your CD, interest rates rise. With your bump-up CD, you can bump up that interest rate. The downside to this type of CD is that your initial interest rate will be lower than that of a traditional three-year CD.
Liquid CD: Afraid of penalties? Consider a liquid CD. You can withdraw money without penalty. Your interest rate will be lower for this privilege. Federal law mandates that CD money must stay in the account for seven days prior to withdrawal without penalty. Banks are allowed to set the penalty-free withdrawal period for any time after that.
Zero-Coupon CD: Want to avoid irksome interest payments? Think about zero-coupon CDs. You buy the CD at a deep discount to par value (the amount you’ll get when the CD matures). The word “coupon” refers to an interest payment. Zero-coupon means no interest payments. You do not receive any interest until the bond matures.
Callable CD: Not afraid of interest rate risks? Then think callable CD. The bank can repurchase its CD from you after a stated interval. Banks usually call CDs in when interest rates drop. The bank reissues the bonds it calls in at a lower interest rate. The upside is that you get a higher interest rate because of the call option embedded in your CD.
The Pros and Cons of Investing in a CD (as opposed to savings, stocks, money-market accounts, 401Ks, etc.)
Pros
Your money is in a safe place with higher interest than it would get in a savings account. While there isn’t much of a chance of making big money, it is a safe investment.
The FDIC (Federal Insurance Deposit Corporation) insures CDs up to $100,000 so you can be assured that you will get the money back when the CD matures.
The rate of return isn’t bad. At 4.65 percent APY, which was the highest CD rate as of this writing, is a pretty good rate that probably beats your bank’s savings account rate.
There are several different types of CDs available that offer various perks and assurances.
Cons
CDs are lower risk, and therefore lower yield. While you can be assured that your initial investment is safe, you don’t have the possibility of earning greater amounts of money that you may earn with higher risk investments.
The CD is susceptible to market fluctuations. While the economy is doing well, interest rates will be higher.
There is a penalty charged (unless you have a brokered CD) if removing the money earlier than the term of the CD.
Despite a CD’s relatively high and safe returns, inflation can still have an effect. Do your research and protect your purchasing power.
With CDs, you’re locked into a set period of time. The shortest CDs are usually six months and offer the least amount of interest. The sweet spot right now appears to be the 12 and 18-month CDs, though if you’re willing to lock it in for 60 months, you will be handsomely rewarded.
CD Rates Offered at Various Lenders
Among the online banks, Sallie Mae offers CDs from 12 to 60 months. Discover Bank offers 12 month CDs. HSBC Direct offers CDs from six to 48 months. Aurora Bank FSB offers CDs from six to 60 months. ING Direct offers CDs from six to 60 months. FNBO Direct offers CDs from six to 60 months. E-Trade offers CDs from three to 60 months. Ally Bank offers CDs from three to 60 months. EverBank offers CDs from three to 60 months.
Everbank has CD rates of 0.75 to 3.39 percent. The minimum balance is $1,500. Ally Bank has CD rates of 0.84 to 2.99 percent. The minimum balance is $0. E-Trade has CD rates of 1.0 to 1.40 percent. The minimum balance is $1,000. FNBO Direct has CD rates of 1.00 to 1.40 percent. The minimum balance is $500. ING Direct has CD rates of 0.75 to 1.25 percent. The minimum balance is $0. Aurora Bank FSB has CD rates of 1.52 to 3.10 percent. The minimum balance is $1,000. Discover Bank has a CD rate of 1.95 percent. The minimum balance is $2,500. Sallie Mae has CD rates of 1.50 to 3.00 percent. The minimum balance is $0.
Among traditional lenders, Charles Schwab offers CDs from 18 to 30 months. Bank of America offers 12-month CDs. Fidelity offers 12-month CDs. Fidelity has CD a rate of 0.75 percent. The minimum balance is $1,000. Bank of America has a CD rate of 1.40 percent. The minimum balance is $5,000. Charles Schwab has a CD rate of 1.90 percent. The minimum balance is $0.
A Guide to Equity-Linked CDs
Apr 27th
Equity linked CDs are a type of CD that is designed to provide you with some exposure to the stock market. Many people choose to invest in equity linked CDs as part of a retirement portfolio. Here are the basics of equity linked CDs and how they work.
How They Work
An equity linked CD is a product that is sold at a bank or financial institution, just like a traditional CD. You will purchase this type of CD from the financial institution for a certain amount of money. Just like a traditional CD, you will also have a certain amount of time that you will have to leave the money in the CD before you can take it out. If you take it out early, you will have to pay an early withdrawal penalty.
Where this type of CD differs from a traditional CD is that it is tied to a financial index. Where traditional CDs pay a fixed rate of interest over the life of the CD, this CDs rate of interest is determined by the performance of a financial index. For example, the CD might be tied to the performance of the S&P 500. If the S&P 500 goes up significantly in value, you will receive a proportionate rate of return with your CD.
Low Risk
This type of investment is one of the lowest risk investments available. Even though this is a different type of CD, it is still a CD. This means that it is insured by the FDIC. Anything that you put into this type of investment under $100,000 is guaranteed by the federal government. If the bank that you invest with goes under, the federal government will come in and reimburse you for your deposit. Most other investments do not offer any such guarantees, so for those that have a low risk tolerance, this makes a potentially attractive investment.
Returns
With this type of CD, you can potentially bring in a much higher return than you could with a traditional CD. If the financial index performs well, your CD is also going to perform well. If the index does well, you have essentially chosen an investment that has no risk of losing your initial investment, but you can still bring in a nice return at the same time.
On the other end of the spectrum, this type of investment may not perform very well. If the index does not move while you have the CD, you may not be able to bring in much of a return. In that case, you would be better off sticking with a traditional CD that has a guaranteed rate of return.
Investment Considerations
Before choosing this type of investment, you should put some thought into what is involved with it. When using an equity linked CD, you will essentially have to time the market correctly in order to benefit. If you do not like the risk that is associated with the stock market, but do want to potentially increase your returns over a regular CD, the equity linked CD might be the way to go.
Comparing a CD Annuity with a Normal CD
Apr 17th
Many investors are choosing to invest in a CD annuity instead of a traditional CD. While they are similar, they have a few key differences as well. Here are a few things to consider about the differences between CD annuities and CDs.
Returns
With a CD annuity, you will usually be earning about 1 percent more than you would with a traditional CD. This leads many investors that were previously earning good returns with a CD to seek out CD annuities.
Who Offers Them
Another difference between these two types of investments is where you purchase them. You can buy CDs from a bank or financial institution. With a CD annuity, however, you will be working directly with an insurance company to make your purchase.
Guarantees
Both types of investment will guarantee you a certain percentage of return over a period of time. With this in mind, you should also understand who is standing behind this guarantee. With a CD, your investment is insured up to $100,000 by the FDIC. This means that if the bank goes under, the federal government will step in and reimburse you. With a CD annuity, the insurance company may be covered by your state’s guarantee association. You need to check with your insurance agent to make sure that you would be covered with this type of investment.
Are Indexed Certificates of Deposit To Good To Be True?
Mar 4th
Recently, interest rates on certificates of deposit have dipped downward again. Within our floundering economy, conservative investors find it hard to be satisfied to grow their money with such investments, but it seems as if there are few suitable alternatives. They prefer safety and can do without the turbulence of the stock market, but such anemic returns on investments hold little value.
One alternative investment with higher yields and safety is the CD that is tied to the market, either to a commodity or a market index. They are known as indexed deposit accounts, market-linked CDs or indexed CDs. They feature the safety of a traditional CD, but offer returns that are reminiscent of the good old days. Plus, such CDs are protected by the Federal Deposit Insurance Corp. Do they seem too good to be true? Such indexed CDs are for real. In fact, they are not necessarily new, as they were initially introduced in 2006. Recently, they are becoming more and more popular due to the diminishing returns on regular certificates of deposit or simple savings accounts. The rate of interest for their yield is based on a market index like the Standard & Poor’s 500 index. In addition to being protected by the FDIC, a borrower is protected in the type of bear market we have been experiencing because no principal will be lost. The flip side is that in a bull market, the CD will pay 100% on the value of the index. Still too good to be true?
Is There any Downside to Indexed CDs?
You may have figured out that indexed CDs are not like your everyday CDs. They are complicated and an investor needs to be aware that they have unique features that tend to cost people money if they are not clear about the terms. In a recent article featured on BankRate.com, J. Scott Miller, a managing partner at Blue Bell Private Wealth Management, was quoted, stating that: “Each company has its own structure… Fees even vary…” In other words, you need to read the fine print.
What are the risks?
Miller cautions that many index CDs are much too complex for the average investor to fully comprehend. He advises that investors need to: “Make sure you understand exactly how they work…” Grace Vogel, executive vice president for the New York Stock Exchange, warns that an indexed CD: “has more risk than a typical bank CD.” There are caps, or limits, on earnings and penalties for early withdrawals. If you are not careful, you can lose money or walk away with earnings that are less than you anticipated.
Brokered Certificates of Deposit
Feb 5th
It used to be that in terms of investments, certificates of deposit (aka CD’s), were relatively simple financial instruments. There was set term or maturity date, the interest rate was fixed and better than the yield on a savings account, interest was paid monthly for the length of the term, and there was a penalty for early withdrawal of your capital. Like life itself however, CD’s have become increasingly complex in the post economic meltdown of 2008-2009, and what once seemed a straightforward investment through your local bank, now has byzantine layers of attributes and considerations to wade through when making a CD purchase.
The current market rates for certificates of deposit are dismal at best, and for many previous investors in this type of financial instrument, locking in a traditional CD at the present low interest rate seems like a bad idea at best. Many every day investors are turning towards brokered certificates of deposit in order to get a higher yield or rate of return than what is offered through their usual financial institution or bank. It is true that a brokered CD can offer a higher rate of return on an investment, but there are risks and complexities that the average consumer needs to investigate before purchasing a CD through a third party intermediary.
As the name suggests, a brokered certificate of deposit, is a CD that is sold to you through a financial planner, advisor, investor, etc. The benefit of this type of CD is that the broker is able to shop the entire CD marketplace to get you the best rate on your investment. Typically a brokered CD offers a higher rate of return than a CD directly from a bank because the broker can combine a large number of individual investments and resell the certificates of deposit to financial institutions or securities investors, and thus offer the individual a higher yield. There are increased risks involved with a brokered CD, and there are important questions to ask prior to using a third party in a CD purchase.
To minimize the potential risks that may come along with a potential high yield, brokered CD, it is important to research and educate yourself about the third party who is handling your investment. Online research can tell an investor if there are any previous complaints or actions against a particular broker. It is also best to find out where the broker will be depositing your CD money; if it is with a bank where the consumer already has certificates of deposit, the new CD has the potential to put the investor over the FDIC insured limits which have gone down to $100,000.00 from $250,000.00 as of January 1, 2010. As with any CD purchase, always make sure the interest rate, terms, and other features are clearly spelled out in writing from the CD broker.
Choosing a Certificate of Deposit (CD) vs. a Savings Account
Jan 27th
What Is A Certificate Of Deposit
A certificate of deposit(CD) is a form of investment offered by banks, brokers and credit unions that are one of the best risk free way to invest your money. Most certificates of deposit offer a fixed interest rate and require one to keep their investment in the CD for a predetermined amount for them to reach maturity. Generally three months to five years. One of the best aspects of a CD is that the interest is compounded until they reach maturity, meaning you will be earning interest on interest. Much like savings accounts, most CD’s are FDIC or NCUA insured, and offer smaller returns than more high risk investments such as a stock portfolio. The majority of CD’s require a minimum deposit of up to five thousand dollars. The more money you invest combined with the length of time till maturity, are the main deciding factors in what your interest rate will be. The only downside to a certificate of deposit is that in most cases your money must be kept in the CD until it reaches maturity, otherwise you will be faced with substantial penalties which could be high enough to where you end up losing money. Thus you should only invest in CD’s if you know you will not need to withdraw the investment for unforeseen reasons down the line.
The Types of Certificates Of Deposit
Traditional Certificate Of Deposit
These are the most common type of CD used, and offer a fixed rate of return that makes them easy to understand and manage. Most traditional CD’s require little to no minimum deposit, and can range from three months to five years for maturity. These are a wise choice for first timer’s and those wanting a simplified and risk free investment.
Variable Rate Certificate Of Deposit
A variable rate CD will leave you more exposed to risk, but generally offer a higher interest rate than a traditional CD. The way they differ from a traditional CD is that your interest rate is tied to market indexes. Which means you are betting on the market favoring you over the time it takes for your CD to reach maturity.
Callable Certificate Of Deposit
Callable CD’s offer a higher than normal return due to the bank’s ability to ‘call’ back your investment after a predetermined amount of time if they feel the investment is no longer in their favor.
Bump Up Certificate Of Deposit
This form of CD differs from others by the account holders ability to increase the CD’s interest rate one time. This is a great way to invest in CD’s if you feel that interest rates will increase after your initial investment and you want to take advantage of that change.
Step up/Step Down Certificate Of Deposit
Much like Bump up CD’s, a step up/down CD will have a changing interest rate. But with this form of CD it starts off as a fixed rate, and after a set amount of time is either raised or lowered to a predetermined rate for the duration of the CD.
Zero Coupon CD
These CD’s are offered at a heavily discounted price due to the extremely long maturity time of up to twenty years. And unlike most certificates of deposit, interest is not paid until the CD has reached maturity.
Liquid Certificate Of Deposit
A Liquid CD is ideal for those who know they may need to withdraw funds from the CD at some point during the term. Most will still have some restrictions as to when, how much and how often you can withdraw funds.
Add On Certificate Of Deposit
Add on CD’s are exactly as they sound. You may add more to your CD down the road, though some restrictions will apply. Such as a minimum additional deposit, and may require a waiting period before you may do so.
Brokered Certificate Of Deposit
Brokered CD’s are manged by brokerage firms that sell large sum CD’s to multiple investors who take a share of the CD. Due to the larger overall investment by the group, interest rates can be substantially higher than if you were to invest on your own.
What Is A Savings Account
Savings accounts are by far the easiest way to safely store your money while also paying interest on your deposit. They are FDIC insured up to one hundred thousand dollars, and allow for withdraw of funds at anytime. Making them the best option for those who do not know if they could keep their money in a CD until it reaches maturity.
The downside to this form of investing is that it is pretty much the lowest return possible due to it being entirely risk free, and with the ability to withdraw funds at any time.
A recent addition to savings accounts is the ‘online only’ accounts which will pay a slightly higher interest rate but lack in person customer service.
Ally Bank Offers 9-Month No Penalty CD
Jan 7th
Perhaps the biggest drawback to a certificate of deposit is that you have to lock your money away for the term of the CD. While you can withdraw your deposit early, with most CDs you get hit with a penalty equal to several months worth of interest. Several banks have been encouraging new customers to open a CD by offering what they call a no-penalty CD. We’ve reviewed the Discover no penalty CD in the past, which let’s you withdraw your money if you lose your job. While a CD that cuts you a break if you lose your job is a nice feature, one that let’s you withdraw your money penalty-free at any time would be even better.
And that brings us to the Ally Bank 9-month no penalty CD, which lets you take out your money for any reason at all penalty free. In that sense, the Ally Bank high yield CD is a true no-penalty certificate of deposit. But here’s the crazy thing–Ally Bank’s rate for its no penalty CD is actually higher than what it offers for its regular 9-month CD. Now the difference isn’t a lot (as of today the no-penalty option is 4 basis points higher than the traditional CD), but why not go for the higher rate and the flexibility to be able to withdraw your money whenever you want?
There’s no question in my mind that the Ally Bank offer is the best no penalty option available today. It beats the rates offered by Discover Bank’s regular 9-month CD. But the real question is whether you chose the Ally Bank’s 12-month CD, which does charge early withdrawal fees, over the 9-month CD the doesn’t charge a penalty. The reason is that Ally Bank’s 12-month rate is currently 60 basis points above the rate for its 9-month no penalty CD. That’s a pretty wide margin given the low interest rates today. Either way, you can check out current rates for all of Ally Bank’s CDs by clicking here.
And for those that are going to deposit at least $1,500, there’s another alternative–the Everbank Online Savings Account. Everbank currently has an online savings account that is offering a 2.51% APY bonus rate for the first 3 months. Even after the bonus period is over, the account still earns 1.77% APY for the first year as of today’s rates. That’s hard to beat, and the money can be withdrawn any time without penalty.
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