Exploring Cd Investments: Turning $2000 Into More

If you're looking to invest $2000, one option to consider is a certificate of deposit (CD) account. CD accounts are considered low-risk investments, and they require little effort on your part. While the Federal Reserve has been lowering interest rates, CD rates are still high, and locking in a high-paying CD now can help you enjoy interest rates of 5% or more for longer, even if other rates drop. For example, depositing $2000 into CommunityWide Federal Credit Union's 1-year CD account will earn you a competitive rate of interest. However, it's important to note that CD accounts may not be suitable if you want frequent access to your funds, as there are typically fees and penalties for withdrawing money before the CD matures.

CDs vs. high-yield savings accounts

When it comes to investing your money, there are several options to consider, each with its own advantages and drawbacks. Here, we will focus on the comparison between Certificates of Deposit (CDs) and High-Yield Savings Accounts (HYSAs).

CDs are a type of savings account that typically offers a higher interest rate than traditional savings accounts. They are ideal for those looking for a guaranteed rate of return, usually higher than a savings account. However, in exchange for this higher rate, your funds are tied up for a fixed period, and early withdrawal penalties may apply. CDs are best suited for individuals who want to lock in a high rate for a set period and don't need frequent access to their money.

On the other hand, HYSAs are savings accounts that provide a higher interest rate than traditional savings accounts, often multiple times higher. These accounts are very safe, as they are protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), ensuring your deposits are insured. HYSAs offer excellent accessibility, allowing you to withdraw funds without penalties in most cases. They are perfect for short- to medium-term savings goals and are a more flexible option compared to CDs.

When deciding between CDs and HYSAs, consider your financial goals and needs. If you want a guaranteed, fixed interest rate and are comfortable with your funds being locked up for a set period, CDs may be a better option. However, if you prioritize flexibility and easy access to your money, HYSAs are more suitable. Additionally, HYSAs are a safer choice if you're concerned about market volatility, as CD rates can be variable.

• Interest Rates: CDs typically offer higher interest rates than HYSAs, but these rates are usually fixed, while HYSAs offer variable rates that can fluctuate.
• Accessibility: HYSAs offer better accessibility, allowing you to withdraw funds without penalties, while CDs lock in your money for a set period.
• Flexibility: HYSAs provide more flexibility, as you can deposit money into the account and withdraw it as needed. CDs require a lump-sum deposit that you agree not to touch for a fixed term.
• Risk: HYSAs are considered safer than CDs because they are insured by the FDIC or NCUA, protecting your deposits up to certain limits.
• Suitability: CDs are ideal for long-term savings and those who don't need frequent access to their money. HYSAs are better for short- to medium-term savings goals and provide more flexibility.

CD laddering strategy

A CD laddering strategy is a great way to take advantage of the benefits of both short- and long-term CDs. It allows you to access higher interest rates, while also maintaining liquidity by having some of your funds in shorter-term CDs.

To build a CD ladder, you will need to open multiple CDs with different maturity dates. The number of CDs, the amount you deposit, and the length of the terms are up to you. Here is an example of a CD ladder with five rungs:

Let's say you want to build a five-year CD ladder with an initial investment of $2,500. You would divide your funds equally into five CDs with different maturity dates:

• $500 in a one-year CD
• $500 in a two-year CD
• $500 in a three-year CD
• $500 in a four-year CD
• $500 in a five-year CD

When each of the original CDs matures, you can choose to reinvest the funds (principal plus interest) into a new five-year CD. This will give you a ladder of five CDs, with one maturing each year, providing you with access to your money at regular intervals.

A CD ladder can also be structured with all short-term CDs, such as three-month, six-month, nine-month, and one-year CDs. This provides even more frequent access to your funds but may result in lower interest rates.

Another variation is the barbell CD ladder, where you have short-term CDs on one end and long-term CDs on the other. This gives you access to some of your funds sooner, while still allowing you to take advantage of longer-term rates.

CD laddering provides increased accessibility to your funds, flexibility in how you split your investments, and the potential for better interest rates. However, it requires active management and there is still a risk of missing out on higher returns from more aggressive investments.

Best CD rates

When choosing a CD account, there are several factors to consider. Firstly, the annual percentage yield (APY) is important as it determines how much your balance will earn in compound interest over the course of a year. The APY is influenced by the length of the term, which can range from a few months to several years. Longer-term CDs often offer more favourable interest rates, but this is not always the case, especially if interest rates are declining. Therefore, it is important to compare different term lengths and rates from various institutions.

The minimum opening deposit is another factor to consider when choosing a CD account. Some institutions require a few dollars, while others may require several thousand dollars as an initial deposit. You should also be aware of early withdrawal penalties, which usually result in losing a portion of your earned interest or even some of your initial deposit.

• Bread Savings: 4.50% APY for a 6-month CD
• Popular Direct: 4.35% APY for a 6-month CD
• NASA Federal Credit Union: 4.34% APY for a 9-month certificate
• Marcus by Goldman Sachs: 4.30% APY for a 9-month CD
• Newtek Bank: 4.25% APY for a 1-year CD
• ETRADE: 4.25% APY for a 1-year CD
• Alliant Credit Union: 4.25% APY for a 1-year CD
• TAB Bank: 4.21% APY for a 1-year CD
• Andrews Federal Credit Union: 4.20% APY for a 1-year CD
• First Internet Bank: 4.20% APY for a 1-year CD
• CFG Bank: 4.15% APY for a 1-year CD
• BMO Alto: 4.10% APY for a 1-year CD

High-yield savings account rate

High-yield savings accounts are a great way to keep your money safe while earning a higher interest rate than traditional savings accounts. Here are some key points about high-yield savings accounts and how they compare to other investment options:

Benefits of High-Yield Savings Accounts:

• Higher Interest Rates: Online banks and credit unions typically offer higher interest rates than traditional brick-and-mortar banks. The best high-yield savings accounts can have interest rates over 10 times higher than the national average.
• Easy Access to Funds: With a high-yield savings account, you can withdraw or deposit funds at any time, providing more flexibility compared to other investment options like certificates of deposit (CDs).
• Low Risk: High-yield savings accounts are extremely safe, with virtually no risk of losing your money. They are FDIC-insured or NCUA-insured, protecting your deposits up to $250,000 per owner or $500,000 for joint accounts.
• Ideal for Short-Term Goals: High-yield savings accounts are perfect for building an emergency fund or saving for specific goals like buying a car or going on vacation.

Drawbacks of High-Yield Savings Accounts:

• Account Fees and Requirements: Some high-yield savings accounts may have monthly maintenance fees, minimum balance requirements, or other restrictions. It's important to carefully review the account terms before opening one.
• Limited Accessibility: Funds transferred between different financial institutions may take a few days to process, so accessing your money immediately may be challenging.
• Variable Interest Rates: The interest rates on high-yield savings accounts can change over time, and they often follow the federal funds rate set by the Federal Reserve.

Comparing to Other Options:

• High-Yield Savings Accounts vs. CDs: CDs offer fixed interest rates and typically higher returns but have less flexibility. With CDs, you usually can't add more money after the initial deposit, and early withdrawals incur penalties.
• High-Yield Savings Accounts vs. Money Market Accounts: Money market accounts often provide similar interest rates to high-yield savings accounts and offer additional features like check-writing privileges. However, they may have higher minimum balance requirements.
• High-Yield Savings Accounts vs. Checking Accounts: Checking accounts usually offer very low interest rates or none at all. While they provide easy access to your funds, they are not ideal for earning interest on your savings.

Examples of High-Yield Savings Accounts:

• Openbank: 4.75% APY
• Pibank: 4.60% APY
• Newtek Bank: 4.55% APY
• BrioDirect: 4.55% APY
• Fitness Bank: 4.55% APY
• TotalBank: 4.51% APY
• Bask Bank: 4.50% APY
• Jenius Bank: 4.50% APY
• Vibrant Credit Union: 4.50% APY
• Poppy Bank: 4.50% APY

Choosing the Right High-Yield Savings Account:

When selecting a high-yield savings account, consider the interest rate (APY), minimum balance requirements, monthly fees, accessibility, and the reputation of the financial institution. Compare options from both online banks and traditional banks to find the best fit for your needs.

CD vs. brokerage or trading platform

While investing in a CD can be a good way to grow your savings, it's worth considering the benefits of investing through a brokerage or trading platform instead.

Brokered CDs

One option is to invest in brokered CDs, which are provided through brokerages and issued by banks. Brokered CDs are similar to regular CDs but can be traded on a secondary market. This means that, unlike with a regular CD, you can withdraw your money early without paying a penalty. However, there is a risk that the CD will have lost value, especially if interest rates have risen since you bought it. You will also likely have to pay a small sales fee.

Brokered CDs generally offer more flexibility than traditional bank CDs. They can have much longer terms, sometimes up to 20 or 30 years, and they often yield more. This is because they are in a more competitive market and the broker invests a large sum with the bank, which generates more interest.

However, brokered CDs can be riskier than traditional bank CDs. The flexibility can make it easier for investors to make mistakes, and there is interest rate risk. Brokered CDs are also not insured by the Federal Deposit Insurance Corporation (FDIC), although the broker's underlying CD purchase from the bank is insured, so it is important to buy from a financially sound company.

Brokerage or trading platform

While this answer has focused on brokered CDs, you could also consider investing through a brokerage or trading platform more generally. This would give you access to a wider range of investment options, including stocks, funds, and securities. However, there is no guarantee that you will make money through these types of investments, whereas a CD offers a guaranteed return.

Frequently asked questions