CD’s, or Certificates of Deposit, are one of the safest ways to put your money to work. Of course, you’ve got to be willing to let the money do its stuff for a while; almost every bank on earth penalizes you if you collect the CD early.
Let’s start with the basics; generally, when something seems too good to be true, it is. But CD’s are literally loans in reverse.
You give your money to a bank for them to invest however they see fit and whether they make money on your money or not, they’ve got to pay you back with interest.
You can make good money on CD’s! Troll around the local banks in your city and compare the interest rates they’re competing with each other, remember?
What’s in this for them, you ask? They’re getting money from you so they can invest it in safe things. They give it back after a set amount of time anywhere from 90 days to 20 years.
Interest, whether the bank is collecting it from you or whether you’re earning it from your CD, is just a fee charged for lending out money.
There’s a formula you can use to determine how much money you’ll collect from the interest on your CDs, and following this formula is essential if you want to maximize the amount of money you’ll collect.
The formula is as follows:
= I(C r)Y where is the amount of money you’ve earned, I is your initial deposit, r is the interest rate, Y is the number of years it will take for your CD to mature and C is how often the interest is compounded.
Hah! And you thought this would be simple! Generally, C will = 1, as interest is usually compounded annually. Now, if your CD takes one year to mature and collects annually, your formula will look like this:
= I(1 r)1
But if your CD matures in five years, it will look like this:
= I(1 r) to the power of 5.
You also have to revise your formula if the CD compounds its interest more than once per year. Quarterly will look like this?
= I(1 r/4) to the power of 4.
= I(1 r/12) to the power of 12.
Using this formula and comparing the interest rates offered by various banks, you can compare them all and determine which CDs are going to offer you the biggest returns.
The advantage to investing in CD’s is that you get way better interest rates than on regular savings accounts.
Aside from the innate safety of a CD, you might notice that the formula above is for figuring out compounded interest, which means that every time your CD earns money from interest, the additional funds are included in the calculation next time the interest compounds.
So the longer the CD sits, the more valuable it becomes and the more money it earns. Also, CD’s come with the warm fuzzy feeling of having a bank owe you money, for once.
However, CDs require both time and a significant chunk of money that you can live without touching. Also, the interest rates aren’t, as a rule, very high. When you can find high interest CD’s, jump all over them.
If you want to make steady money off of your CD’s, work them out so that you can collect from them at a fairly regular rate.
Twelve CD’s started at the beginning of each separate month will be, next year, collectable at the start of each month.
Of course, this requires a much larger initial investment and won’t really be worth it until the CD’s have collected a significant amount of dust.
Time is a big factor in CD investments and you generally can’t determine how large of a CD you’re going to take out; the bank will usually have pre-determined amounts that they’re willing to buy.
So if you actually have, say, 20,000 to invest, it’s a good idea to make it so that they all mature during different parts of the year.
That way, if you want the money back, you probably won’t have to suffer an early withdrawal penalty and you won’t have to kill your entire investment to do so.
Ultimately though, you can’t make a living off of safe CD investments unless you’re already so rich that it doesn’t matter.