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CDs and Investments Big and Little

Certificates of Deposit or CDs are one of the safest investment tools out there. Unfortunately, this means that they rarely produce sufficient income by themselves to retire on, but at the same time, as long as you make sure your deposits are FDIC (Federal Deposit Insurance Corporation) insured, and that your investment does not go over the guarantee amount (generally $100,000 per financial institution though there are some exceptions), you are not at risk of losing the money you have invested, which is not the case with many other investment vehicles.

With a CD, the investor essentially buys a certificate from the bank for a specific period of time (providing the bank with capital it can invest elsewhere,) thus helping it to maintain liquidity and profitability. In exchange for this, you are paid interest on this money, which will be paid to you when the CD reaches maturity.

The basic rule of CDs is that the longer the life or term of the investment, the higher the interest will be. Thus, a 6-month CD will pay less interest both in absolute and proportionate terms than a five-year. Additionally, the interest that accrues over the life of the certificate will compound, meaning that the bank will be paying interest upon the interest causing exponential growth in this small area.

CDs, like most other investments, have penalties for early withdrawal, so it may benefit the user to purchase them in a staggered fashion, depending on perceived future needs – e.g. a few six month, a few one year and some five years – and how much one has to invest. It is also usually possible to buy CDs at a one-month rate, if you know you will need it quickly, but not absolutely immediately.

This particular feature also makes CDs an ideal end investment, meaning that once you have reached retirement and closed out your 401(k) or IRA or stocks etc., that certificates of deposit can be a very nice short-term way to make a few dollars more, without locking yourself into something long-term.

CDs generally pay from 3-6%, though they also have a format called “jumbo” which calls for a substantially higher investment – between $10,000 and $100,000 depending on the financial institution – but as a rule, also offer a proportionately higher interest rate.

While 3-6% may not seem substantial, it is important to remember that this investment will only form a portion of your portfolio. Nor should you forget the accrued and compounded interest, which makes them more profitable than at first glance.