High-yield CDs give safe returns at a cost
As the economy slowly crawls back from recession, high-yield CDs remain an option for savers concerned about safety. Providing a guaranteed rate of return, certificates of deposit can be an attractive prospect for investors seeking security combined with rates better than those of traditional savings accounts. Here's how to find a high-yield CD that's right for you.
Know the risksAlthough CDs offer safety -- they are offered by banks and usually insured up to $250,000 by the Federal Deposit Insurance Corp. -- they also severely limit investors' access to their funds during the CD's term. Generally, longer-term CDs pay more, which has earned them the "high-yield" nickname. When investigating high-yield CDs, investors should know that their funds won't grow fast. They should also be aware that some CDs come with stiff withdrawal penalties for investors who pull their funds out early.
Shop aroundOf course, not all CDs are created equal. Before investing in a high-yield CD, investors should compare rates of one-year versus five-year certificates of deposit and ask about penalties for withdrawing funds early. Once you've narrowed your choices down to a few select products, a CD calculator can help determine how much total interest each product will yield.
Maximize your returnsInvestors looking for guaranteed interest and liquidity can enjoy both by purchasing multiple high-yield CD products with different maturities. Better known as a CD ladder, this strategy provides investors with steady returns while at the same time freeing up cash at regular intervals. Creating a CD ladder that fits short- and long-term needs is contingent on how much liquidity the borrower needs, how often they need to withdraw funds and how long they're willing to invest.
The drawback to choosing a CD ladder is that staggering funds over several shorter-term investments will yield smaller returns than a lump sum invested in a longer term-product would. Additionally, those who opt for a CD ladder will have less liquidity than they would if they invested in a longer-term high-yield CD combined with a completely liquid account such as a money market or savings account.
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