By earning interest over a period of time, a certificate of deposit (CD) can help you save money for important life events, like buying a house, having children or retiring.
It is important to remember the difference between CDs and regular bank accounts. You put money into savings accounts to store your money and potentially earn a little interest over time, but you invest in CDs. Like all investments, there is always a strategy behind it.
Putting money into a CD is a stable investment that can incur more benefits over time. Investors often roll the principal and earned interest from their current CD into a new one once it matures, as part of a strategy to earn higher CD rates moving forward. Moreover, they may set up a CD ladder, which consists of multiple CDs created all at once with different maturity dates.
Here are three benefits to rolling money into a new CD:
1. Grow your money with higher interest rates
Investing in new CDs may be especially advantageous when interest rates go up.
Let’s say you are 50 years old and want to open a CD to start saving for retirement. You could set the maturity date at 10 years from now, and put in $100,000, which would be considered a jumbo CD. You also have the option to set up a CD ladder, putting $25,000 into four separate CDs, with maturity dates at 1, 3, 5 and 10 years.
The CD ladder model allows you to benefit from high interest rates today as well as potentially higher interest rates in the future. If interest rates increase in the next year, you may be able to roll over the earnings from that first CD into a new one with a better rate.
2. Avoid early withdrawal penalties
Having one long-term CD provides less flexibility than rolling money into multiple CDs over a period of time. Having multiple CDs with separate maturity dates gives you the option to take out your money every time one of the CDs on your ladder matures, which is valuable when dealing with unexpected life events.
Circling back to our example again, let’s say another year goes by and you want to take money out of your CD to help pay for your kid’s college tuition. Unfortunately, this can result in an early withdrawal penalty.
However, with a ladder strategy, you will not have to wait long for your next CD to mature. When it does, you can collect your earnings and focus that money elsewhere. Also, keep in mind that the withdrawal penalty depends on how much time you have left until the maturity date. Therefore, taking money out of a CD with a shorter term may be much less costly than doing so with a jumbo CD.
3. Protect your investment
CD laddering is not like investing in IPOs, penny stocks or emerging markets. That kind of investing may involve greater gains, but it also carries greater risk. CDs, on the other hand, are very low risk. When they mature, you will always get back the principal you put in plus any earned interest.
For an added level of security, your money will be protected by the Federal Deposit Insurance Corporation (FDIC). Like regular savings and checking accounts, CDs are FDIC-insured. As a single owner, there will be a limit of $250,000 across all your deposit accounts.
Learn more about CDs by talking with Comerica
Still wondering if CDs are the right investment opportunity for you? Contact Comerica Bank today to learn about the unique features offered with our fixed- and flexible-rate CDs.
