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Certificate of Deposits

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CD Investment Strategies

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CDs or Certificate of Deposits are low-risk investment. This investment basically requires you to lock your money at a bank or credit union for a certain set of period. It can be 6 months to 5 years or more. At the end of your term, you will receive your invested money along with the interest. Usually, banks or credit unions offer higher interest rates for deposit account than those for the traditional saving account. When your CD reaches its maturity date, you can withdraw your money or roll it over to another new CD. However, you are not allowed to cash your CD before the maturity. If you do early withdrawal, you will likely have to pay penalties.

When it comes to CDs, you have to apply investing strategies in order to gain more profits. Investing in one CD sounds dull and gives less interest. Here are three strategies you should consider if you want to have more profitable CDs:

1.    Laddering
This is the most common strategies used by CDs investors. Laddering means you should purchase several CDs with fixed interest rates but different in maturity date. For example, you buy one year, two years, and three years CDs. By the time the one year CD mature, you can re-invest it in three years CD, and so on. By doing the laddering, you can have CDs which mature on regular basis. This strategy is also beneficial for you since you can either re-invest your CD when the due comes or cash it out for unpredictable or emergency situation. Yet, you should re-invest it so that the ladder will prevail.

2.    Bullet
This strategy’s purpose is to buy CDs which have the same maturity date.  Say you purchase one year CD today, two years CD next year, and three years CD the following years. Yet, all your CDs are mature at the same time or aim at one certain time, that’s why it called as bullet. This kind of strategy is usually used to pay major cash outlay scheduled in the future.

3.    Barbell
When you want to use barbell strategy, you only purchase short-term and long-term CDs. The goal of this strategy is that you can lock in higher interest rates for the long-term CDs as well as having financial securities for the short-term CDs. This strategy works when you buy two short-term CDs, one year for instance, and two long-term CDs for three years CDs or more. The short-term CDs can be used to respond for emergency or either to be re-invested for higher yields. While you have this flexibility, you still have the interest payment from the long-term CDs.

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Types of Certificate of Deposits

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Certificate of Deposits (CDs) are safe investment among other investments. Many financial institutions offer this type of investment such as banks or credit unions. Unlike any other investment which has high risk of losing money, CDs are guarantee by the FDIC with one condition. Only one deposit account in a bank or credit union with the amount of up to $250,000 will be protected. Certificate of Deposit works when you invest your money into that one bank or credit union for an agreed period of time. The banks usually offer higher interest rates than saving account or checking account. This interest rate will give you return over the set period of time. Actually, there are many types of CDs offered by the banks. Hence, these are common CDs bought by the investors:

Traditional CD: This kind of CD is the most common form of CDs. You will receive a fixed interest rate over the set period of time. Generally, when your CDs reach maturity, the banks will inform either to cash out your money or roll it over to a new CD. Many people choose traditional CDs since they can predict how many they will receive at the end of the term. However, this type of CD does not allow the investor to withdraw their money before its maturity date. Early withdrawal will result in a severe penalty.

1. Bump-p CD:  This type of CD allows you to take advantage of rising CD. You can swap only once to a higher rate during your investment period and keep that interest rates for the remaining time. Generally, bump-up CD offer lower initial interest rate than the traditional one.

2. Liquid CD: It is the flexible CD which allows you to withdraw your money during your investment period without a penalty. However, Federal law requires that you are not allowed to take your money for at least seven days after you make initial deposit. Some banks may extend the period and also allow a specified amount of money.

3. Callable CD: Banks have the power to recall the CD before the maturity date or at a specified time. It happens when the interest rates fall significantly from the initial interest rate offered. To attract the investors, banks often offer higher interest rate for this type of CD. Callable CD is popular among the brokerage.

4. Zero-Coupon CD: this CD does not pay out annual interest, it re-invest the payment to be added to your initial deposit instead. So, the profit will increase because of the increasing investment. However, that re-investment of the interest rates will be taxed.

5. Brokered CD: this type of CD is the one offered by the brokerage. Brokerage has all-access pass to thousands of banks’ CD offering, so they usually offer a higher interest rate. This CD may sound appealing but you have to pay a fee to purchase the account.

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Why You Should Invest in CDs?

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Certificate of Deposits (CDs) are safe investment. This type of investment is suitable for those who want to begin an investment but quite afraid of the risk like losing their money. It is not like any other type of investment such as forex trading or stock investing which have both high chance of profit and loss. Certificate of Deposit is basically similar to a saving account but has higher interest and you are not allowed to draw your money over a set period of time. You can purchase it through banks, credit unions or financial institutions.

1.    Safe and Secure Investment
The main reason why people really like this type of investment is that CDs are considered as safe investment. It is because FDIC fully insured deposit account with maximum amount up to $250,000 per account per bank. For those people who want to ensure their investment security, CDs can be a great option. In addition to that, it means that you can only have one deposit account at one bank. It means you can have multiple CDs at different banks.

2.    Competitive Interest Rate
CDs offer higher interest than savings or checking accounts. Moreover, the interest rates of CDs tend to be stable unlike saving accounts which may fluctuate depending on the economic condition. CDs are not affected by the ups and downs of the money market. For example, if you have a 5-year CD, you are guaranteed that fixed amount of the interest rate over the five years, no matter what the market’s doing.

3.    Deposit Length Flexibility
Basically, you can earn money through CDs when you lock your money for a certain period of time at a certain bank or credit union. This one of the unique characteristic of CDs offers you the length of time you want to invest your money. It can be 6 months, 1 year, 3 years, or 5 years or even more. This type of investment is really suitable for those who think long term ahead because deposits can give them real and stable returns. Also, you can predict how much return you will get prior to your set period of time.

Despite of those advantages of Certificate of Deposits, there is one fundamental thing you should know about CDs regulation. You are not allowed to withdraw your invested money before its maturity date. Early withdrawal of deposits may cause your accrued interest to forgo. Some financial institution may give you some withdrawal penalties which require you to pay a certain amount of money. However, some others may have different policies.

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Pros and Cons of Certificat of Deposits

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If you want to invest your money, there are a bunch of options available for you starting from stock investment, gold investment, real estate investment, and many others. In investing, there are always risks yet usually together with the greater risk, the greater return you can make. However, for those who seek for a lower risk, there is an option for investing. Certificate of deposits are a low risk type of investment which allow you to make some money. It is backed by the National Credit Union Administration and the Federal Deposit Insurance Company. Basically, certificate of deposit (CD) works when you purchase a CD from a bank or credit union in which you invest some money with higher interest rate, you are not allowed to draw your invested money for specific period of time.

Pros:

1. Safety
CD is considered to be the least risky investment currently since it is guarantee by governmental institutions and a system of check and balance up to $250,000.

2. Higher Interest Rate
Compare to saving account, CD offers best possible returns. It is because the interest rate of CD is generally higher than saving deposit. The longer term you lock you money, the higher yield of interest rate you can get. The interest will accrue throughout the term until it reaches maturity.

3. Wide Selection
There are several kinds of CDs you can choose depending on the banks or credit unions. You can also choose the time frame or the maturity date usually from one to five years that fit you.

Cons:

1. Limited Liquidity
The reason why you purchase a CD is to lock it for a set period of time. It means that you do not have the access to your invested money since you have agreed with the term and condition. If you are in an emergency situation and want to draw your money immediately, generally, most banks and credit unions will cost you some severe early withdrawal penalty. You have to pay certain fee, usually a big amount of money and you do not want to do that. Therefore, you should set your own maturity date that suitable for you.

2. Inflation Risk
CDs can be quite risky when it comes to inflation. The interest rates of CDs are normally at fixed rate and when sudden inflation occurs, you may lose the purchasing power of your money since the interest rate gains are overtaken by the inflation.

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