November 21, 2017

How Indexed CDs and Hybrid CDs Provide a Useful Alternative

Indexed CDsA certificate of deposit, or CD, is provided by a bank or credit union and is known as a time deposit, meaning once you invest money it has to stay there for a predetermined length of time to build interest. Most CDs are standard fixed-rate CDs and they accumulate a constant rate of interest throughout the term of the CD. Regardless of what happens with the market rates, whether they increase or decrease, the rate of interest on the CD will remain the same until the maturity date (time the term ends).

Indexed CDs

But lately there has been a slump of low rates on standard CDs, and banks and lenders are beginning to think outside of the box to encourage customers. A new series of nontraditional CDs are becoming popular, and they are anything but fixed-rate. Indexed CDs, also known as variable-rate CDs, are a type of CD whose rates are indexed to the rates of something else. Generally they are indexed to a stock index like the S&P 500 or the Dow Jones Industrial Average, but they can also be indexed to other things like bonds, commodities prices, and foreign currency.

Hybrid CDs

Banks and lending institutions are also now offering hybrid CDs, which are similar to indexed CDs in their flexibility but have some other differences. Two examples of hybrid CDs are the step-up CD and bump-up CD. With a step-up CD your interest rate takes a step up (increases) in predetermined intervals throughout the duration of the term. With a bump-up CD the investor has a limited ability to, when the market rates are higher, bump up the CD rate to match the market. Another advantage to the step-up CD is that you can compute what your accumulated rate will be at the end of the CD and compare that to fixed-rate CDs, whereas with indexed CDs and bump-up CDs you have to wait until the maturity date to see exactly what your return is.

Risks and Rewards

Indexed and hybrid CDs are great because they give investors flexibility, more control, and a chance to participate in the market and possibly earn higher rates of interest on the CD. At the same time, if market rates go the opposite way and decrease then the principle on the CD is still protected and left untouched. Another perk is that these nontraditional CDs are offered by banks, which means they fall under the Federal Deposit Insurance Corp’s insurance coverage of up to $250,000.

Hybrid CDsOne of the downsides to hybrid and variable-rate CDs is that if market rates decrease then you might not earn as much interest on your invest as you would with a standard CD. But the biggest drawback is the complex nature of these CDs and the many varying terms and conditions investors have to figure out and remember. For instance, the manner in which returns are calculated can differ widely between banks. Your return may be measured in a variety of ways, such as by a one-to-one on the index’s appreciation, a participation rate, a point-to-point system, and by the quarterly averages of the market. Some people think they are getting a fantastic deal, but they might not actually understand the fine print and they might end up with less than they had planned. So be sure you understand every detail and term before investing in one of these CDs.

Waiting for Higher CD Rates? Alternative Investments for Your Money

Low CD RatesThese days, with CD rates so low, you may be hard-pressed to find an investor who is buying certificates of deposit specifically for their yield. Though the end of such dismally low rates may be near, for some people it cannot come fast enough. But your money has to go somewhere, right? There are not any other kinds of options that offer the same rewards and returns as certificates of deposit do, but there are a few good places to put your money while you hold out for better CD rates.

Alternatives to CDs

  • Money market accounts – Just like CDs, money market accounts come backed with a $25,000 insurance guarantee from the Federal Deposit Insurance Corp. However, unlike most CDs (not counting Liquid CDs), money markets are considered liquid accounts. This means that if a better deal or better interest rate happens to come along you can withdraw your money from the account without incurring any early withdrawal penalties. Just know that the yield on these accounts is pretty low, and you should certainly look for an account that waives the monthly maintenance fee.
  • High-yield checking accounts – This accounts come with more stipulations, but the average interest rate yield is much higher than a money market account. The downside is that there are the regular checking account factors to deal with, such as debit card and direct deposit balance requirements and account balance caps.
  • Money market funds – These are short-term options that invest in things like commercial paper and U.S. Treasury Bills. Money market funds are like money market accounts in that they offer a decent yield (still smaller than a CD though) and some liquidity. But their biggest difference, and their downside, is that they are mutual funds instead of bank accounts and thus not insured by the FDIC. These funds can also incur expenses from time to time that are passed on to the investor, decreasing their overall value.

Conclusion

CD Investment AlternativesThankfully there are other relatively safe options of where to put your money, and these are three of the best. Obviously these alternatives are not certificates of deposit and so they do not have the same benefits and yields. However they are decent places to store your funds while you eagerly await the return of high CD rates.

Factors to Consider When Choosing Where to Invest

Where to InvestCertificates of deposit (or CDs) are basically loans that you are making to the bank. At the end of the term (the maturity date) the bank will pay you back the loan plus whatever interest has accumulated during the length of the term. It is up to the investor to choose the length of the CD, which can range anywhere from thirty days to thirty years. The most common CD terms are 2 Year CDs, 3 Year CDs, and 5 Year CDs, and generally speaking the longer the term the more interest you can earn on the certificate of deposit.

Safe and Secure Investment

CDs are considered to be a very secure investment strategy. They may not earn you the high return that mutual funds and stocks can, but they are protected from a fluctuating market. Whereas your rate of return in stocks can rise or plummet drastically depending on the market, you will always know what your return is going to be in a fixed-rate CD. The Federal Deposit Insurance Corp protects your principal with up to $250,000 in insurance coverage, plus there’s the added benefit of the extra earning you will make from the interest.

Where to Look

There are three places you can start your search for certificates of deposit: the Internet, local banks, and credit unions. The Internet provides the easiest way to review and compare a wide range of CD rates and options. But you might want to try your local bank first, especially the institution that you currently bank with, because they might be able to get you a good deal for being a member. Credit unions, unlike banks, are not trying to return any kind of profit to stockholders, so their initial rates may be much better.

What to Look For

There are so many different kinds of CDs to choose from, including Jumbo CDs, IRA CDs, Liquid CDs, Variable-Rate CDs, etc. Regardless of which option you choose, the main thing you want to look at is the initial rate of interest and whether the interest is fixed or flexible. Once you have found some decent rates you might want to look a little closer into the institution you will be investing with. Here are some things to consider:

  • Size – Banks and credit unions range from small local start ups to mega corporate branches. If they have been around for more than ten years and still only have around $20 million in assets than they probably aren’t trying to contend with the big dogs. It is up to the individual to decide whether they want to invest with a small or a large organization. They each have their pros and cons so be sure to look into those. For example, big banks might be more convenient but they will probably have much worse customer service.
  • Capital : asset ratio – The capital (or equity) to asset ratio is very important. The ratio shows how much liquidity the bank has to meet financial needs. It also gives an indication of how reliable and secure the bank will remain in coming years. Anything between 7%-8% and above is considered to be a good ratio.
  • Profitability – You would never want to invest in a bank that isn’t making a decent profit, and especially not in one that is incurring losses. The only exception is with a new bank, which may carry a loss for up to three years as it is getting established. Be very cautious about banking with new banks as they usually have yet to build up a trusted brand name. If the bank has been around for a while than you can look through their history to see how they have been faring. What is their profitability like from year to year? What are their loan losses like, and are the decreasing or increasing?

Investing CDsLooking into these different factors will give you a good idea of what the bank is like and whether or not it is a safe and profitable location to invest your funds in a CD. The Better Business Bureau, other rating websites, and customer reviews can all give you a better clue to the reliability of the institutions you are looking into. Remember to compare a lot of different places before choosing one to insure that you are picking the very best option.

Deciding Between Short-Term and Long-Term CDs

Choosing a CDA certificate of deposit (CD) is a type of investment where you put money into an account, it accumulates interest, and at the end of the term you cash out your funds. If you decide that a CD seems like the best investment option to you, then you need to decide what kind of CD you want to get. There are many different types, but the first thing you need to figure out is how long you want to invest in the CD. As you will read below there are advantages and disadvantages to both short-term and long-term certificates of deposit.

Short-Term CDs

A short-term CD is generally one whose term falls between three months and a year. These types of CDs are a good option for new investors because the quick turnaround allows them to see how efficient the CD is. The downside is that these CDs will not be able to earn a lot of interest because of how short the term is. The upside is that you will have access to your money sooner (which means being able to reinvest sooner) and not have to worry about withdrawing early and incurring penalties.

Long-Term CDs

A long-term CD has term lengths anywhere from two years to thirty years. The biggest advantage is that the longer the term is the more interest you will be able to accumulate. The disadvantage is having your funds tied up for an extended period of time. You should only invest in a long-term CD if you have emergency money set aside and are positive you will be able to cover any unexpected circumstances that may arise. If for whatever reason you have to withdraw the funds early you will be burdened with heavy withdrawal fees.

Other Factors to Consider

Another option you have to consider is how much money to invest. Most people will have to decide between investing a large amount of money for a short time, or a smaller amount of money for a long time. To get the most out of their investments some people choose to create a CD ladder. The basic strategy is to invest multiple amounts of money in accounts with different term lengths. For example, you could invest $20,000 for two years, $10,000 for five years, and $4,000 for ten years. This may make things more complicated, but the differing intervals give you more flexibility and control over you investments. While your funds are in the CDs you can be keeping track with the market rates, and if something better comes along then when one of your CDs matures you can transfer the funds over to the better account.

In Conclusion

CDRates.orgWhether you decide on a short-term CD or a long-term investment you will want to compare offers from different lenders before choosing one. This will insure that you are getting the very best returns for your money. CDRates.org offers a great tool for this. You can choose which type of CD you want and then it will show a list of lenders and the APY, interest rate, and minimum deposit requirement of each. This is a great place to start your search for the very best CD rates!

CD Laddering or Flexible CDs – Which is More Beneficial?

CD LadderingFor a long time certificates of Deposits (CDs) were seen as a valuable investment strategy. Then initial rates plummeted and investors become wary of them. But times are changing for the CD as bank and lending institutions are coming up with creative and nontraditional ways to entice consumers. These nontraditional CD accounts are striving to solve the problem of standard CDs, namely the rigid account structures and the lack of flexibility in the face of rising market rates.

Whether you’re a traditionalist or you want something new, there are two main strategies that are helping people make money with certificates of deposit and they are CD laddering and flexible CDs.

CD Laddering

For people who want to stick with standard CDs, but who aren’t getting the returns they want because of low interest rates, there is an investment method known as CD laddering. The way laddering works is by investing different sums of money in multiple CD accounts, each of which has a different maturity date. This way you are constantly earning interest and reinvesting funds to earn even more. Plus if the market rates go up while your funds are locked in you can take the money from whatever account matures first and transfer them over to an account with the better rates.

Flexible CDs

The biggest argument for flexible types of CDs is that they offer much more flexibility and control for an investor over his or her account. Two main types of flexible CDs are liquid CDs and bump-up CDs.

  • Liquid – One big problem people have with traditional CDs is that if, for whatever reason, they need to cash in early and get their money back they will be weighed down with heavy early withdrawal penalties. A liquid CD, also known as a no-penalty CD, allows the investor to liquidate the CD and remove the funds early without a penalty. This sounds great, but just be aware that this type of CD may come with limitations on the number of times you can withdraw and how much you can take out.
  • Bump-Up – Another problem investors have with standard CDs is that once you invest in one the rate of interest is locked in, even if the market rates rise during the term of the CD. It can be very frustrating to see much better rates and not be able to do anything about it. Bump-up CDs give investors the ability to bump up the interest rate on their account whenever they want. The only downside is that there is a limit on how many times you can bump up an account. But smart investors who are closely paying attention to the market should have no problem with this.

Conclusion

CD Investing StrategiesReally each investment strategy has its own pros and cons, and which will benefit you more depends on what you want from your investment. Flexible CDs offer, as the name says, a lot of flexibility and options on your account. But they are also not as familiar to people, are constantly changing, and their terms and conditions can be complex and differ from lender to lender. If this makes you nervous and you’d rather stick with the tried and true then CD laddering is a great investment alternative.

A Warning About the Disadvantages of Liquid CDs

Liquid CDsDespite how great liquid certificates of deposit may seem, they will not be to the advantage of every investor. Their biggest benefit is the fact that they offer early withdrawals without penalties, something which standard CDs do not provide. The typical CD comes with hefty fees and penalties for those who wish to cash out on their investment prematurely. But despite this Liquid CDs are not without their own drawbacks.

Learning More About Liquid CDs

The terms and conditions and interest rates on CDs will differ widely from bank to bank. And the no-penalty guarantee only works if you abide by the withdrawal guidelines, which usually place restrictions on when you can withdraw and how much you can take out. For example, most lenders make you wait seven days before you can withdraw anything, and many of them will only let you withdraw a couple of times a year. You are also sacrificing yield for flexibility because Liquid CDs have pretty low interest rates.

Other Disadvantages

  • Withdrawal limits – As mentioned before, Liquid CDs often come with a lot a limitations. They may restrict how much money you can take out, placing minimum and maximum withdrawal amounts on the account. They may also restrict how often you can take money out, such as once a month or once every seven calendar days.
  • Higher deposit minimums – Unlike standard certificates of deposit, which give you a wide range of investment opportunities, Liquid CDs occasionally have larger investment minimum requirements. For instance, at some banks the minimum deposit required on a Liquid CD is $25,000. And if you happen to drop below that amount at some point then you will be charged with an early withdrawal penalty.
  • Lower rates – Most Liquid CDs come with lower interest rates than those found in standard CDs and other types of money market accounts. The short-term CDs are the worst, with yields that are immensely lower than the average rate. Long-term Liquid CDs have better rates, but you are giving up flexibility and tying up your funds for a longer period of time.

Conclusion

Downside to Liquid CDsThe marketing strategy of Liquid CDs is that they don’t have fees for early withdrawal (if you stay within the guidelines). However the downsides might be enough to deter some investors. Terms and conditions are different amongst various lenders, so if you do want a Liquid CD you should do some comparison research before you pick anything. If Liquid CDs don’t seem like the right decision to you than you might be better off with a standard CD, such as a Short-Term CD.

The Importance of Understanding CD Maturity Dates

CD Maturity DateEvery time you invest in a Certificate of Deposit it has a deposit date and a maturity date. It is very important that you understand what it means for your CD to mature and to know when this will happen. Cashing out on your CD before the maturity date will usually result in a penalty, such as the loss of all of the interest you have been accumulating.

What is a Maturity Date

A CD is a type of time deposit account. These accounts must be left untouched for a specified amount of time so that the invested funds can earn interest. The maturity date is the date that the CD term ends and the investor is finally able to withdraw his or her money. Just when the CD will mature, be it several months or several years, is dependent upon the CD term that one invests in.

In general, the longer the term of the CD, i.e. the further away from the maturity date it is, the higher your rate of interest will be on the CD. Earning more money by selecting long-term CDs can sound very rewarding. Just remember that once your money is deposited it is tied up on the account and, in most cases, it cannot be retrieved without incurring a penalty. The harshness of the penalty depends on the bank or credit unions, but it will range anywhere from losing the built up interest to losing some of the principle deposit as well.

Why These Dates are Important

As mentioned before it is important to know your CD maturity date so that you do not get fined for premature withdrawal. Another reason it is important is because when the time comes banks and CD lenders typically will renew the account and rollover the funds into a new deposit with the same terms. Unless you have given the bank specific instructions not to renew, you could miss out on having access to your money until the second maturity date arrives. Knowing the maturity date is crucial if you don’t want to reinvest because you need the money, or because interest rates have gone up.

In Conclusion

Understand Maturity DatesYou should take steps to understanding every part of your CD and its terms and conditions. This includes realizing what maturity dates are and knowing when yours is due to end. Be proactive by putting the end date in your phone or calendar. Banks should send out a renewal notice, but the grace period usually only lasts ten days. By educating yourself on the terms and conditions of your CD you will be able to reap the benefits and take control of your funds once they mature.

Reasons Why You Should Invest in a High Yield CD

High Yield CDsThere are a lot of different ways that you can invest your money safely and securely. High yield certificates of deposit are one great option, but they, and really all types of CDs in general, often get overlooked in a market full of stock and bond options. CDs might not offer the incredibly high returns that other options can give you, but they do provide a safe way for you to have control over your personal finances (especially ones that are insured by the FDIC). And smart investors will have a diverse investment portfolio that will allow for CDs alongside other high yield accounts.

Why Choose High Yield CDs

There are numerous choices when it comes to selecting a certificate of deposit, however the high yield CD, as its name implies, is going to offer you the highest rate of return on your investment. Generally these types of CDs come with a set term (which can be anywhere between three and thirty years) and a fixed rate of interest. Below are three of the main reasons why high yield CDs are a great investment opportunity:

  • Protected terms – There are those who may claim that having your money tied up for so long is a terrible idea. What if there is an emergency and you need the cash back? High yield CDs come with heavy early withdrawal penalties tacked on. But, for the wise investors who already have emergency money set aside, being unable to access your funds can be a good thing. Having your savings locked away means that they will stay safe and that you won’t be tempted to cash out when you just want the money (versus actually needing ).
  • Better rates – A high yield CD is going to pay out higher rates of interest than other kinds of certificates of deposit. It will also provide a better interest rate than a high yield savings account. Everyone wants better rates, and for smart investors this is the place to find them. The higher the rates the more interest you will be accumulating, and when the CD matures you will have that much more money added on to the principal amount.
  • Better laddering opportunity – Building a CD ladder means putting money in multiple CD accounts, with varying maturity dates, instead of a single deposit account. The different term lengths mean that your funds can be constantly maturing and reinvested. This is a great way to always ensure that you are getting the best rates. This CD ladder strategy works well with regular CDs, but the returns are even greater when investing in high yield CDs.

Conclusion

Secure InvestmentThe fact is that high yield certificates of deposit are a great asset to add to your investment portfolio. If you have enough extra money set aside for emergencies, usually about six months worth of salary, then putting some of your other funds in a long-term plan is certainly worth the reward. And just remember that CDRates.org is a great resource for finding the best rates on high yield CDs.

How Rising-Rate CDs are Quickly Becoming the Next Best Thing

Rising-Rate CDsThere has recently been a change happening in the financial world of certificates of deposit. Banks and lending institutions are beginning to notice a shift away from term deposits and towards liquid deposits. This means that liquid accounts, and other types of time deposits, have more money in them now than they ever have before, and they are certainly sounding like a good investment option. To stimulate and increase this interest in flexible CDs, banks are introducing rising-rate CDs.

As their name implies, rising-rate CDs are ones in which the rates will rise alongside market interest rates. Before now many investors have expressed a disapproval of long-term CDs. They are hesitant to have their money tied up for an extended amount of time, especially if interest rates are increasing higher than their current rate and they can’t do anything about it.

Rising-rate CDs remove this fear by allowing the rate on the CD to fluctuate with the interest rate levels in the marketplace. These CD types are also a way that investors and consumers can protect themselves from increasing core inflation.

Types of CDs

There are three different types of rising-rate CDs, each with slightly different terms and conditions:

  • Step-Up CDs – These are a very simplistic type of CD whose rates will rise at different prearranged periods over the course of the CD term. It’s like every month or few months (depending on how long the CD term is) your rate is taking a step up toward higher interest rates. For those just getting in to rising-rate CDs, these are a great first try because they are the most straightforward.
  • Bump-Up CDs – These types of CDs allow investors to raise their own rates a certain amount of times during the term of the CD. This gives the investor enormous control over his or her investment and it can be very beneficial, especially if you are closely following the market and understand the best times to bump up your rate.
  • Liquid CDs – These CDs, which were mentioned earlier, allow investors the opportunity to transfer funds out of one CD and place them in another. An example would be investing in one CD, waiting until one with a higher interest rate comes along, and then shifting funds over to that one. These work well because, unlike standard CDs, there are no early withdrawal penalties. However there are certain conditions so be sure to check those out before you transfer anything.

Rising-Rate Tradeoffs

Just know that something as great as a rising-rate CD doesn’t come without a price. You can’t have rewards that good without giving something up on the front end, and there are a few factors to consider that might offset the seemingly flawless nature of the CD.

  • Lower initial yields – The biggest flaw with rising-rate CDs is that their initial yield is so low. Sure this will balance out over the length of a long-term CD with rate increases, but what about those who cannot wait that long? Anyone who invests in a short-term rising-rate CD probably won’t get the same returns as they would on a standard CD. Generally speaking, Bump-Ups usually have the lowest initial yield, followed by Step-Ups, and then Liquid CDs have the best.
  • Rates vary – Not only are the initial rates low, but you could end up with a rate that is lower than even the other rising-rate CDs. CD rates will vary widely depending on the bank or lending organization. So your best bet is to do some research and shopping around before you settle on anything.
  • Be aware of conditions – Not only will the initial rates vary between banks, but the terms and conditions of the CD can differ also. As mentioned before, even though there aren’t early withdrawal penalties there are still other things to look out for with rising-rate CDs. For example, depending on the terms of a Liquid CD you might only be able to withdraw/transfer a couple times a year, or only up to a certain amount of money.

CD InvestingIf you don’t like the tradeoffs that come with long-term interest rate yields than rising-rate CDs will probably not be the option for you. But they do have a lot of benefits for flexible investors. And even if you don’t like the current terms, stay plugged in to the market news. Such nontraditional CDs are becoming immensely popular, and thus their terms and conditions are changing all of the time to fit the need of the investor.

Avoid the Consequence of an Early Withdrawal Penalty on CDs

Early Withdrawal PenaltyA Certificate of Deposit is a great place to invest some of your hard earned money. But be aware that all of the positive aspects of CDs, the good interest rates and the extra cash built up in the account, may vanish if you decide to cash out on the CD before it has finished maturing. Cashing a CD before the maturity date is called an early withdrawal, and it can come with some heavy penalties.

Strong Consequences

In fact it is a Federal law that all CDs cashed out for early withdrawal in the first six days after deposit may be subject to a minimum penalty of seven days’ simple interest. Again, that is just the minimum penalty, and there is no maximum. It is up to each individual bank to decide withdrawal penalties, and some have been known to go up as high as a year’s worth of simple interest on 36 month CDs that were withdrawn early. For most banks the penalty depends on how long the CD term is for and how close to the deposit date you withdraw.

Think Before You Invest

These penalties are awful because not only are you not earning interest anymore, but you have to pay the remaining interest you would have earned if the CD hadn’t been cashed out early. This is why individuals should make certain that they have enough extra money for emergencies and unforeseen circumstances before they invest funds in a Certificate of Deposit account.

Avoiding Penalties

There are various cases and reasons why one might be able to get the early withdrawal penalty waived. If the CD owner pass away, or is acknowledged to be mentally incompetent, the penalties will certainly be removed. Many institutions also show leniency to elderly customers, as the penalties on IRAs or 401(k)s for those over 59 ½ will often be waived. There are two other instances when early withdrawal penalties may be removed.

A brokered CD is one that you purchase through a deposit broker. A big reason many people buy these CD types is because they come without withdrawal penalties. This is because you are selling the CD on a secondary market instead of cashing it out. The downside is that you have to sell for whatever you can get, and the return might be less than what you originally paid. But at least you have the cash you need without extra fees. The same principle works with 3-year CDs. If you sell at a time when the highest rate on the market is lower than your current rate, you will earn a premium. But if you are forced to sell when the market rates are higher than you current rate you will be letting it go for less.

Conclusion

Invest in a CDYour best bet before investing in a CD is to determine how long you can live without the money. Many people go straight for the high yield long-term plans because they offer the highest interest rates, but then later realize the term is too long and have to withdraw because the need the money back. If you are unsure or have any doubts you should probably go with a low yield short-term CD. The shorter maturity will also give you greater flexibility when it comes to reinvesting!