Because of the recent and catastrophic drop in the stock market performance,
investors-big and small-are turning to conservative ventures. This explains the
return of certificates of deposits (CDs) and this time, yielding high interest
rates for shorter periods. Who needs stocks when you can have CDs yielding 7%
and without risks to your investment? Most would. However, you must proceed
with caution. In order to maximize your CDs, it is important to know what,
where, and until when you are willing to part with your hard earned money.
Nowadays, it is not enough to distribute your eggs in many baskets. Just like
any investment, venturing out to CDs does not only require investing big; it
matters to invest smart, too.
Video: Safe Bank CDs
High CD Rates With No Risk
Is this possible? Not only is this feature possible; it is an ongoing practice.
Since the stocks in Wall Street prove to be volatile, banks and financial
institutions are seizing the opportunity to veer investors away from the stock
market and back into the banks. Getting high rates at no risk is possible when
you avail certificates of deposit nowadays. So far, the highest interest yield
for a one-year CD is roughly at 7.25%--rate that promises much for risk-free
investments, more particularly with money destined for a specific purpose.
While this rate seems low in comparison to stock investments, the yields and
the period to receive your return of investment will lure you to think
otherwise. As a result, investors are now diversifying their portfolio by
investing in CDs. The Federal Reserve made this possible by increasing the
interest yields for CDs on shorter periods. Banks offer higher interest on CDs
to attract more depositors and also to accommodate more loan requests.
CDs and FDIC Limits
But before you jump in and invest your money, you have to check how much you are
willing to part with. If you are wary of bank liquidity, you can be rest
assured by checking the new limits set by the Federal Deposit Insurance
Corporation (FDIC). Beginning October 3, 2008 until December 31, 2009, the FDIC
imposed new limits on the maximum insurance coverage for every account. For
single accounts, the FDIC coverage is up to $250,000. For joint accounts,
insurance coverage is up to $250,000 for each account owner. Aside from these
sets of coverage, the Certificate of Deposit Account Registry Service allows
your FDIC coverage for CDs to a maximum of $50,000,000. The list of insurance
coverage may be combined.
Is Your Bank Covered by FDIC?
Before you start investing in CDs, you should first check if your bank is
insured by FDIC. The best way to find out is by checking the FDIC web site .
However, you need to make sure that the bank you plan to invest CDs in to be
not only insured by FDIC, it should be a bank in good standing as well. You can
find a list of failed banks in the same web site.
Checking Your Bank's Ratings
Knowing whether the bank you plan to transact with is able to deliver on its
promise is a matter of grave concern. While FDIC holds a list of failed banks,
there are banks or financial institutions that fall short of client
expectations. In order to forestall such thing from happening, it is advised
for you to check the bank's ratings. There are many sites that provide bank
ratings. These sites are usually graded by financial experts and consumers. By
checking these, you will have an idea on how your bank can deliver on its
promise.
APR vs. APY
When it comes to compounding interest rates, two terms are important: the Annual
Percentage Rate (APR) and the Annual Percentage Yield (APY). APR is the
computation of annual interest without taking compound interest into account.
This is used more in credit card facilities, in order to conceal other charges.
APY, on the other hand, takes the measure of compound interest into account,
raising interest rates more. APY is used for measuring CDs. As to which is
better will depend on which side of the fence you are on. If you are the
lender, you would most likely go for higher interests. It does not necessarily
mean that low interest rates offer low payments though. You have to be
inquisitive as to the rates being offered to you. It is better if you can ask
the details of how the interest rates are being computed for you.
Here are some tips to make sure you are getting the best out of your CDs:
Choose short-term CDs. Seize the opportunity the Federal Reserves are
offering you. The purpose of short-term CDs is to enable liquidity on your part
while returning higher investments. If you have money set aside for a certain
undertaking, you can opt to put it in as a CD for one year and see your money
grow. At maturity, not only were you able to stash some cash but you were able
to earn a considerable amount from it too. And this happened just by waiting.
Window shop for better rates. While it is true that the highest interest
yield offered in the market right now is nearing 8%, not all banks and
financial institutions provide the same yields. Before you decide on a certain
bank, you can look around for better rates and the covered periods. Taking the
time to do this can give you the best investment opportunity.
Inquire and probe. Since you are going to part with hard earned money, it
is not enough to inquire from banks; it is important to probe. After all, you
are the prospective lender, so you should know if you are going to get a good
return on your investment. Ask the bank about the rates they offer and what
kind of interest rate they use. You might also want to look into the
computation of your interest rates as well as the terms the bank has for CDs.
There are banks that allow you to withdraw your CD investments at anytime,
converting your money to a savings account. See if this is applicable to the
bank you are transacting with.
