Earn a Risk Free Return with a Certificate of Deposit

Article Written By: kmmulli

Are you tired of the ups and downs in the stock market? Do you want to lock in a safe return for a designated period of time? A Certificate of Deposit is the best financial product to meet this goal for you.

A certificate of deposit is a way to generate a virtually risk-free return on your investment. You agree to give the financial institution access to your funds for a certain period of time ranging from 3 months to 10 years. In return you receive a guaranteed return during that time frame.

Financial institutions are willing to give you this guaranteed return because they can generate higher returns lending your deposited funds in consumer and business loans. You get the agreed upon Annual Percentage Yield (APY) from the Certificate of Deposit, and if you invest wisely you don't have to worry about risk.

How are CDs risk free? The Federal Deposit Insurance Corporation (FDIC) offers deposit insurance on your total deposits at member financial institutions. FDIC insurance applies to deposit products including Money Market accounts, and Certificates of Deposits, up to $250,000.

If the bank fails and you're under the insurance cap then you won't lose any of your money, but some or all amounts over the deposit limit may not be recovered.

The national average for interest rates on saving accounts is 0.20% (at the time this article was published). This is a fraction of the returns that can be earned in other investment vehicles. CD rates are typically higher and higher rates mean more interest earned for you. Even if you open it for only three months at 0.60% you're still earning triple what you would in an average savings account.

Despite the fact that savings accounts don't pay a lot in interest many people continue to use them because they want to have access to their money in a pinch. The fear of not being able to get to their cash keeps them from earning higher returns.

While it is true that you lock up your money for a period of time you can take steps to avoid a liquidity issue by utilizing a CD ladder. To set up a this, all you have to do is open a set of CDs that have different durations that divide well into each other.

For example, let's say you have $10,000 you want to put into CDs, but you don't want to put all of it into a 1-year. Instead you split the money into four different types: a three month, a six month, a nine month, and a twelve month. After three months your first CD will mature with $2,500 (plus interest earned). You roll that money into a new 12 month CD. After another three months your original six month CD will mature with another $2,500 (plus interest earned). You roll that money into a 12-month CD.

If you continue this process your CDs will be effectively laddered”, you'll earn higher interest rates, and you won't be without access to 25% of the funds for more than three months at a time.

If a 24 month Certificate of Deposit earns a 1.60% annual interest and a 24-month CD at another bank is only 0.74%, you can easily double the interest you earn over what the national average rate earns by selecting the best rate available.

About the Author

Kevin Mulligan - Certificate of Deposit. Always looking for financial tips and advice from institutions, he tends to look up information at http://www.discoverbank.com/ on a regular basis.

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