The contemporary financial scenario has made it very complicated to choose the ‘ideal’ medium of safely investing money. A Certificate of Deposit (CD) is widely accepted as the safest way to invest money and reap interests at substantial rates. This is exactly what most investors search for — high returns with the lowest possible degree of risk. CDs are fixed-income and time-based financial instruments that are usually issued by banks.

Investing in a CD overcomes all the apprehensions that come with investing in investments related to the stock markets, unless you choose for the not-so-popular Bonus Interest or Callable CDs. Even then, all CDs provide greater insulation against market fluctuations and a greater security cover. At the time of your CD’s expiry, you can simply claim the interest that was promised to you along with the principal amount.

Safety Insured

What makes CDs a uniquely secured way of investing your money is that they are termed as deposit accounts by the Federal government. This means that CDs purchased from banks are insured by the FDIC — Federal Deposit Insurance Corporation. This is the chief Federal body in the US that insures various types of bank accounts. The maximum insured amount for a CD has been set at $100,000 by the FDIC and for the retirement accounts, the limit has been raised to $250,000.

Know Your Facts

CDs have been sometimes discriminated for offering negligible liquidly and offering rigid interest rates over extended periods. However, CDs aren’t static in terms of offering liquidity for your capital as long as you have planned a proper strategy regarding your investment portfolio. You should be able to plan your investments in CDs in such a way that:

• You don’t have to break your CDs before time and pay penalties (i.e. you maintain sufficient liquidity)

• You benefit from interest rate fluctuations (i.e. you have the liberty to invest money at higher interest rates)

You Don’t Have To Suffer For Safer Investments

If the two problems, mentioned above, are resolved, CDs become perhaps the wisest option for investments. This can be done through an approach called ‘Laddering’. It is a simple method of organizing your CD investments that makes them safer and more profitable.

How Is Laddering Done?

The interest rates offered on CDs vary over a period of time. Banks will determine these rates based upon Federal guidelines and their own financial performance. This means that you should use your CD-related investments in such a way that you can benefit every time the rates rise. Laddering simply means that you don’t invest all your money in a single sort of CD. Instead, you should purchase different CDs spread over a range of time. This means that you purchase CDs for different terms.
Example: If you have a total of five CDs, each can be invested for varying terms, i.e. for five years, three years, two years, one year and seven months.

What Is The Advantage?

This helps you to beat any period of low interest rates. Since you have different CDs maturing at different intervals, you can re-invest them at the new (i.e. higher) rates being offered. Again, after small intervals of period, you keep getting money to spend (liquidity) as the various CDs keep maturing at their respective but different maturity dates. This approach removes every conceivable problem related with CDs and you still don’t compromise on the safety of your investment.