3 tips for today's CD investors
With current CD rates lingering near record lows, CD investors may be struggling to come to terms with subpar earning potential. As you explore certificates of deposit, or CDs, and other banking products, here are three tips to keep today's interest rates from weighing you down.
Avoid climbing too high
Laddering helps investors maximize the return on their CDs, but current CD rates could leave you stuck with low earnings for many years. If you are considering the ladder strategy, a step-ladder approach may be the best route to take. This method focuses on shorter-maturity CDs to give you the option to extend into longer maturities when interest rates are more appealing.
The penalty can be your friend
Early withdrawal penalty: These three words strike fear in the hearts of many low-risk investors. However, investing further than your investment horizon and paying that withdrawal penalty can work to your advantage in some cases. Known as "riding the yield curve," this strategy's cost-effectiveness hinges on the amount of the penalty. Be sure to do the math before incurring any penalties to ensure you come out ahead of the curve.
Alternatives do exist
Bankrate's 2010 High Yield Checking Study includes a number of checking accounts with interest rates above 4 percent, which is significantly higher than today's average CD rates. However, these accounts require more maintenance than watching money grow in a certificate of deposit. Educate yourself on balance caps and additional terms to determine if a high-yield home makes a better fit for your financial lifestyle than a CD.
As you compare CDs, you can calculate your yield to estimate your earning potential before saying goodbye to your money until it reaches maturity.