Investing in a certificate of deposit (CD) can be a beneficial strategy when timed right. With terms ranging from 10 days to 10 years, CDs can be used to meet a variety of financial goals, whether saving for a big purchase or portfolio diversification.
However, it is important to be conscious of the rate environment when investing. You want to lock in the best bank CD rates now so you can earn and save more in the future.
But when is the best time to invest? This can be a hard determination to make, especially in a low-rate economy. Even during such times, CDs can offer competitive rates and a stable savings tool — as well as upside for the future should rates increase.
Low-risk options
Stocks are among the most common investment types, but market volatility can become an issue. In such instances, investors may need to diversify into other asset classes for less risky bets.
CDs can offer comparably lower risk and steady passive income flow. Stocks can rise and fall on sudden volatility or even a corporate social media post. A CD will collect steady interest even in the face of uncertain economic conditions. CDs are also insured by the Federal Deposit Insurance Corporation (FDIC) up to the legal maximum amount allowed by law, adding another layer of investment security.
Higher balance = higher rate
Even if prevailing rates are low, you may get higher rates by opening an account with a higher balance or longer term. Banks generally reward customers who keep higher balances over a longer period of time. This can be advantageous if you have idle cash. Investing in a CD may put your money to work for you. Sometimes, other increases or benefits may be offered based on checking account relationships with the bank.
CDs are flexible
CDs can fit a short- or mid-term investing strategy as well as they suit a long-term savings strategy. This is because both fixed- and flexible-rate CDs exist. Fixed-rate CDs often feature the same interest rate over a longer period of time, while flexible-rate CDs offer a variable rate over a shorter time frame.
While early withdrawal penalties do exist, the variety of terms gives investors the flexibility they need to respond to economic changes.
You can time the investment so the CD matures in weeks instead of months, or months instead of years, whichever fits your strategy and outlook.
CD laddering can pay off down the road
CD laddering is the process of reinvesting your proceeds of a matured CD into another account, thereby building your earnings and cost savings.
Laddering is highly popular and can make investing in CDs during low-rate economies a shrewd move. The process entails opening multiple CD accounts with different terms, like one, three and five years. Once the first mature, it is reinvested into the next, and the snowball builds from thereon.
If rates increase later on, you can stand to gain by having reinvested the earnings into CD accounts with higher and higher rates as the balance grows. You can even pull from this amount to pay for minimum monthly fees.
Talk to Comerica Bank about investing in CDs
Want to hear more about the advantages of investing in CDs? Contact Comerica Bank to learn about our fixed- and flexible-rate CDs, as well as how your checking account relationship may qualify you to receive an interest rate bonus on a CD.
