Certificate of Deposit: Make it Work For You

Whenever I have more money in my checking account than I need to meet my monthly expenses, I’m confronted with the dilemma of what to do with the surplus funds. My banker suggested putting it into certificates of deposit or CDs. How can I use certificates of deposit to make the most money from my savings?

Are there a lot of places for ordinary people to make 5 percent off their savings of, say $10,000? A certificate of deposit can get ordinary people there when an ordinary savings account won’t.

My Banker’s Picture

So my banker talks up retirement funds, education funds, and estate planning when I bring up my dilemma about extra funds. And the recommendation is to buy certificates of deposit, or CDs, to increase the interest paid on my extra funds. Your goals determine the length of maturity, so how far you are from retirement might prompt the banker to recommend a longer period CD. People interested in a guaranteed rate of return on their money will be interested in a certificate of deposit. The rate is usually higher in a CD than in a typical savings account.

The interest rate your bank pays really makes a difference in how competitive their CDs are, but looking for that five-percent return is where you want to be. The amount of deposit you must make varies.

For example, you can invest as little as $500 in a five-year CD to receive (approximately five percent) interest at places like Goldman Sachs or CFG Community Bank in Baltimore. Non-Maryland residents take advantage of the CFG online banking service.

If you invest in the right CD, you will easily beat the interest rate of an average savings account.

Do Certificates of Deposit Function Understandably?

It might be a little tricky, but indeed they do. When the market goes up, so too makes your certificate deposit because the interest rate is tied to the Fed’s interest rate. So when the Chairman of the Fed raises the interest rate, your rate also goes up.

Your banker offers you a CD because they don’t lose liquidity because you leave the money in for a set amount of time. In a savings account, you can take it out anytime you want.

Disadvantages

It’s not like there’s some miracle panacea to make all your investment dreams come true, and the disadvantages of CDs sound discouraging to ordinary people, so here are the cons of buying certificates of deposit.

Maturity: Money in a CD is subject to maturity, the time you must keep the money in it. Otherwise, the CD wouldn’t make as much money. When you want to take your money out early for an emergency or to meet an expense, forgotten or unexpected, you pay a penalty for cashing in a CD. Terms run from one year to four years, and you can leave them in longer, though when you visit the bank, you may change to a new strategy when the CD is mature. 12, 18, 36 and 60-month maturity is available.

Size of Deposit: Another issue is the money you have available to invest in a CD. If you don’t have a sizeable deposit at your corner bank, you may not get as favorable a return as you would like, so prepare to shop around to find a rate you like. Obviously, investors’ expectations play into this, and those expectations may or may not be reasonable. Still, you may be disappointed by the returns if you trust your corner banker to sell you a CD. Needless to say, you can get into a savings account with $50. You’ll need ten times that amount to buy a CD.

Inflation and Taxes: Inflation also can hurt returns on CDs, according to Investopedia. The return on the CD is taxable income outside your retirement income and can be taxed.

Advantages

Higher Interest and Security: First, your money is insured by the FDIC, so you don’t have to sweat your investments like you would purchasing, say, stocks, bonds, money market mutual funds, other types of securities, commodities, or crypto assets. And compared to a regular bank account, you get a higher interest from a CD.

Transparent Interest: Once you’ve figured out how much money you can invest in CDs, you can shop around. Get what you want in interest rates by knowing the amount to invest and for what length of the term. Beware, though, the Feds can monkey with interest rates, and banks might not pay you as much because of the Feds changing interest rates.

Ladders: Ladders are CDs with two or three-year terms, so you can spread your money over several CDs and get part out faster than four-year CDs. So, you could buy a 12-month CD, an 18-month CD, a 30-month CD, and a 60-month CD and spread the money over staggered chunks of time.

What Happens If the Market Crashes?

Let’s be clear: CDs are not savings accounts, and it would be inaccurate to suggest they were analogous, homologous, or even a Cromagnon ancestor to a savings account. But when you buy stocks, your money is just out there, used by investors to buy things, rather than sitting in a bank safe, sound, and insured. So, your money is safe in a CD.

How To Purchase a Certificate of Deposit

It’s easy: Go to your local bank. The FDIC, the Federally Deposited Insurance Company, insures it. There’s a sticker on the door or window or teller window to reassure you that your money is safe in that institution, $250,000.

Explain to the bank teller that you’d like to buy a certificate of deposit, also known as a CD. The bank teller will help you buy one or pass you on to a handy banker who will show you what the bank has available.

You must choose a CD at this point or walk; the first product will probably be what the bank perceives will work for you. Discover the CDs that pay a competitive rate, that’s 5 percent or higher. I set aside my banker’s recommendation and started shopping online instead. The choices are greater and more varied.

How to Make a Certificate of Deposit Work for You

So, if you’ve read the tea leaves, you can take advantage of the kinds of CDs in the marketplace to make the most of your savings. While it’s always buyer-beware out there, a bank is not shy in telling you about products they believe in. Frankly, they all want to pitch to a prospect.

If you’re unsure that you will profit from this exchange, just back away from a product and agree only to consider it.

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