Invest In Certificates of Deposit (CDs)
Once shunned by investors, CDs, or Certificates of Deposit, are making a huge comeback due to their safety.
Instructions
1. What is a CD?
A certificate of deposit is simply you lending money to a bank for a fee. The fee is the rate of interest a CD yields. This loan is for a set and limited time. The bank gets your money for a set and limited time, you get paid in return.
2. Where do I buy a CD?
Any bank will sell you a CD. They all want your money. Many people who use CDs have them at every bank in town depending on the rate of interest they can get. This is one of the main ways retail banks compete with one another.
CDs offer historically low returns. Adjusted for inflation Certificates of Deposit can actually cost you money. However, when one's concern is less the return on one's money than the return of one's money CDs can be a good choice.
3. How long to tie up your money?
CDs are sold in increments that vary from a few months to a few years. The shorter you go the lower your annualized return. The longer you go out the higher the annualized return.
Remember however that rates go up and down. So what might look like a good deal today might not look so good in a couple of weeks if rates go up.
Also remember that annualized return is just that, "annualized." Many people make the mistake of thinking that the interest rate they get on a CD is what they will get as a return. If however one buys a 6 month CD at 2%, one's return at the end of the term will be 1%. The banks probably won't correct your misunderstanding.
4. How much money?
One's rate of return on a CD can vary quite a bit depending on the amount one chooses to invest. Typically, the higher the amount, the higher the yield. Rates usually go up at 10k, 25k, 50k, and 100k. No one should have more than $100,000 invested in CDs at one bank.
5. Why no more than $100,000 in one bank?
The reason most people invest in CDs and eschew the higher typical returns of other investments is safety. If you have $100,000 or less in one bank your entire deposit is insured by the FDIC. So if the bank goes under the government will replace every dime of your evaporated $100,000, or less.
There are ways to insure more than $100,000 in one bank but I won't go into it here. Just stick to a max on 100k per bank, and you'll be fine.
