With a turbulent start in the stock market this year, many investors are left wondering what to do with their investments. They are faced with choosing stable, low-risk options that offer little to no return or high-risk options in an attempt to increase returns. Times like this create fear and in return, many people choose to do nothing.
How often have people stated that rates are going to go up, to keep your money liquid and start investing when rates rise? Savings rates will eventually go up, but not significantly and not very fast.
If you’re leaving money in a cash reserve or very low-yielding savings account, then it might be time to consider investing in a CD.
What is a CD?
A CD, or certificate of deposit, like a savings account, is insured by the NCUA for credit unions and by the FDIC for banks. They offer higher rates of return on your money than a savings account, in exchange for keeping the money invested for a fixed time frame (typically one, two, three or more years). The intent is for the CD to be held, and not touched, for the chosen term. Upon maturity of the term, the money may be withdrawn along with the interest that was earned.
Is a CD a worthwhile investment?
The biggest advantage of a CD is the ability to grow money safely. Unlike the stock market, you don’t risk losing your principal investment and are guaranteed to grow your money at the agreed upon rate.*
Additionally, in most cases a CD will yield a greater return than a savings account or a money market account. So if you have money sitting in a cash reserve, savings, or low-yield money market account and you can afford to lock up some of your savings for a period of time, then a CD may be a good choice.
Questions to ask yourself before investing in a CD
- How much cash do I need? Savings accounts and money market accounts are liquid accounts, which allow you to access cash anytime you need it, without penalty. Before investing in a CD, which is non-liquid, you’ll want to determine how much money you can actually hold and how much you will need to have access to in a specified timeframe.
- How liquid do I need my money? CDs with longer maturity terms will yield larger interest rates. So, if you’ve determined that you can you afford to park your funds for a longer period of time (several months or even years), a CD is worth adding to your investment portfolio.
Laddering = Liquidity
One way to leave funds liquid while still earning a bit more is to ladder your CD portfolio. Laddering means taking out several CDs at different length terms, and as each CD matures, you can choose to move your money into a liquid account or roll it into another CD.
Consider this example with a $10,000 investment:
1 Year CD = $2,000
2 Year CD = $2,000
3 Year CD = $2,000
4 Year CD = $2,000
5 Year CD = $2,000
When your 1-Year CD matures, you can take that amount and cash out or roll it into a 5-Year CD. The next year, when your 2-Year CD matures, you can cash out or roll that amount into another 5-Year CD, and so on, resulting in recurring liquidity.
Each individual must consider their own financial and cash management strategies and goals. We offer several tools and services to assist you, including several online calculators that can help you compare different savings scenarios and Arbor Financial Wealth Management, which has helped many members review their investment options and take action.
*This statement assumes you do not withdraw your money before the maturity date of the CD.
**Annual Percentage Yields (APYs) earned on certificates are calculated by the actual daily balance method and are paid and compounded monthly. A penalty may be imposed for withdrawals before maturity.