When putting your money into savings, the goal is always to earn as much as you can while preserving the initial deposit value. One potential way to do this is through a high-yield certificate of deposit (CD), offered through banks, or a Share Certificate, offered through credit unions. Island Federal Credit Union can provide you with the support you need to determine if this is the best investment tool for your specific situation. Here are some details to help you make that decision.
Understanding High-Yield CDs
A high-yield CD or Share Certificate is a common type of deposit account that is designed to pay a higher-than-average interest rate than some other types of savings options. When making a decision on where to put your money for an extended period of time to allow it to grow in value, a high-yield CD or share certificate could be the ideal choice.
How High-Yield CDs Work
A high-yield CD requires several specific requirements. First, there is often a minimum deposit requirement, which means you must deposit a certain amount to open the account. Sometimes, this can be as low as $500 but may be higher. The funds remain in the CD for a set number of months, and during that time you should leave the funds in place and not remove them. As long as you do that, the interest will build.
A high-yield CD must also be left in place for a specific length of time. Three-month is typically the minimum and these CDs can range from 6 or 7 months up to 14 months in some cases. Some can last as long as 84 months. Remember, the benefit here is that you receive a guaranteed interest rate on the funds deposited. Since this is a compounding interest, the value builds rapidly. Compound interest occurs when the interest earned each month is added to the balance of the account, allowing it to continue to build on top of each other. The rate is always applied to the balance. This method allows it to grow in value much faster. Once your period is up, you can cash in the CD at that time, or you may be able to roll it over into a new CD to continue growing its value.
Terms range widely based on the financial institution. You can choose terms ranging from 3 to 84 months. The high-yield CD’s rate can change based on various factors, including current economic and financial climates.
Benefits of High-Yield CDs
The benefits of a high-yield CD are numerous. While they do carry some additional restrictions on access, leaving your money in place in these accounts directly leads to improved earning potential. Here are some of the benefits you could see using high-yield certificates to grow your wealth.
Higher Interest Rates
The ultimate benefit of high-yield CDs is that they help you earn more money in a shorter period of time. To do this, these accounts have a higher interest rate. Note that interest rates at IFCU are different from other financial institutions. More so, they change often, which means you’ll want to find out what rates are right now to determine if you should open a high-yield share certificate.
This means that you have a much higher rate of return over time. That makes high interest rates from these share certificates the best way to save for many people.
Very few types of investments are guaranteed today, but CDs are as long as you deposit the agreed upon amount and leave the funds in place for the entire term. This can give you predictability in the returns you need. If you opened a high-yield share certificate with a $1000 deposit and it had an APY of 3.30%, with a 12-month fixed term, at the end of that term, you would have over $1032 in your account.
Unlike investments in stocks or other strategies, there is very little to no risk in these types of investments. One of the reasons for that is that they are backed by the Federal Deposit Insurance Corp (FDIC) if from a bank or the National Credit Union Administration (NCUA) if a credit union.
Investing in a CD is a way to earn money, and you may have to pay taxes on the interest you earn. They are taxed as ordinary income. There are some strategies to reduce your tax obligations, such as holding your CD in a traditional IRA or other retirement savings.
Factors to Consider when choosing a High-Yield CD
Now that you know what high-yield CD benefits are, you can start comparing several options to determine which is right for our needs. Keep in mind that high-yield CDs may offer different terms among various types of CDs, along with differences among various financial institutions.
CD Terms and Rates
What is most important for most people is how much they will earn from the investment and how long they need to keep their money in the CD to achieve that goal. Note that as you compare options in high-yield certificates, you do need to look at the following:
- Various financial institutions
- Several term lengths
- Available rates in the current period (these will change often)
Some financial institutions offer higher rates than others, while many will have different deposit requirements. Consider how long you can leave your funds locked up and then determine which financial institution can offer the best return for you.
Early Withdrawal Penalties
The benefit of using a CD is allowing the money to remain in the account for an extended period of time. You agree to do this so the financial institution can then invest that money. If you remove the funds early, you could face penalties for early withdrawals. The cost of these penalties ranges widely between organizations. Often, it is charged based on the interest. For example, if you agree to a 6-month CD and you withdraw money early, you may lose three months’ worth of interest. Fee structures and types differ, with some financial institutions allowing interest-only withdrawals for some funds.
Financial Stability of the Issuing Bank
Also take a close look at the financial institution itself. What is their financial health rating? Are they a long-standing company with a solid presence? You can look at the financial institutions’ credit rating and any available financial statements to determine this. You want to be sure your money is protected with a financial institution that will be around long-term.
As noted, there is little risk with high-yield CDs. When you purchase share certificates from a credit union, your deposit qualifies you for protection from NCUA. That means that your balance is protected up to NCUA limits if you obtain your CD from a specific NCUA-covered organization. ISFU is an NCUA-insured location.
How to Find High-Yield CDs or Share Certificates
What is a high-yield CD account capable of doing for your financial needs and savings objectives? Here is a step-by-step process to help you determine exactly what to expect and how to get into the best high-yield certificates available today.
Research and Compare CD Rates
Start with your own financial institution to learn about available CD rates. Most banks and credit unions offer them, and many display their current interest rates online, making it easy for you to get started.
You can also use tools like Bankrate’s CD rate tool or USA Today’s best CD rate listing to help you compare current rates (these tools may not be updated to include all options, and some may earn a fee if you choose to open an account with a linked financial institution.)
Consult with Financial Advisors
CDs can be a very valuable investment to build your portfolio. If you are looking for a low-risk way of diversifying your investment portfolio, share certificates work well. The key to remember is that they are often one component of a larger plan. Talk to your financial advisor about how well they could work for your needs. Be sure to ask about rates, any commission they earn, and fees.
High-Yield CDs vs. Other Investment Options
As noted, CDs are one type of investment strategy. How does a high-yield CD work in your situation? It could be a part of a bigger picture that includes other savings options like the following.
High-Yield CDs vs. Traditional Savings Accounts
High-yield CDs and traditional savings accounts are two of the fastest, low-risk ways of saving money. Typically, a high yield savings account will have a significantly higher rate of interest than a traditional savings account. It’s possible to obtain either without any fees involved. The difference between a CD and high-yield savings is that the CD’s higher rate comes from making your money virtually inaccessible for a period of time, whereas a savings account provides easy access to your money.
High-Yield CDs vs. High-Yield Savings Accounts
High-yield CDs and High-yield savings accounts typically offer higher interest rates, with CDs typically having a significantly higher rate of earning power. Savings accounts provide easy access to your money but have a much lower interest rate.
High-Yield CDs vs. Money Market Accounts
Another savings vehicle to consider is a money market account, another very safe, low-risk way of earning money on the funds you save. CDs tend to have a higher interest rate than money market accounts. Most money market accounts give you access to your money with rates much closer to a traditional savings account.
Tips for Maximizing Returns on High-Yield CDs
Consider a few strategies to help you build the biggest bang for your buck from CDs.
Consider a CD Ladder Strategy
A CD ladder is a strategy where you’ll open CDs at various times and various lengths. When short-term CDs reach maturity, you convert them into longer-term CDs. This method allows you to have frequent access to funds while your money grows. Here you may:
- Open a $1000 12-month CD
- Open a $1000 2-year CD
- Open a $1000 3-year CD
These are opened at the same time but have different lengths, allowing you to spread your money over time.
Reinvest Interest or Choose Monthly Payouts
In this strategy, you’ll simply reinvest the interest you earn in new investment vehicles, including new CDs. Some CDs allow you to choose monthly payouts.
Let’s say you put the bulk of your $3000 investment into a 3-year CD. Then, you use the remaining funds in a short term CD. This allows you to take advantage of changing CD interest rates to potentially realign how much you are earning if better rates are available in that short period of time.
Take Advantage of Promotional Rates
Some financial institutions offer promotional rates from time to time. A variety of strategies exist here. Be sure you take a full look at all costs, limitations, and stipulations in the fine print.
Risks and Limitations of High-Yield CDs
There are some downsides to consider about high-yield share certificates.
Interest Rate Risk
Changes in the market interest rates can impact CD investments, including historical trends. Know that interest rates don’t always climb, and the earning power of a CD is often less than other high-risk investments.
Inflation can erode the real value of returns, especially if it jumps significantly. As inflation rises, the amount you’re earning is worth less.
Make sure you consider all investment types. There are times when those who have more time to wait for their money to build and can take on bigger risks may wish to choose other types of investment strategies that have a bigger potential for earning.
Early Withdrawal Penalties
If you think you may need to access these funds, recognize the risks of doing so. There are fees, and it also depletes the value of keeping your money in these accounts.
Share certificates, especially high-yield share certificates, can be an excellent option for low-risk investing as long as you can keep your funds inaccessible. For many people, they are one component of a well-rounded financial strategy.
Get Started with Island Federal Certificates
Take a closer look at what Island Federal Credit Union offers in high-yield share certificates and other investment strategies. Schedule a consultation with our team to get hands-on help.