Certificates of Deposit for Your Cash Reserves

Monday, March 10 at 09:40 AM
Category: Personal Finance

Certificates of Deposit (CDs) can be ideal vehicles for investing funds that you do not need in the near term. CDs are promissory notes issued by banks, credit unions or thrift institutions. They are time deposits usually having maturities ranging from 30 days to as long as ten years. The most popular terms are from 90 days to five years. Since they are time deposits, they usually offer higher interest rates than savings accounts, but they have penalties for early withdrawals. 

Here is an example of CD maturities and interest rates:

When choosing the maturity of a CD to buy, it is important to consider your liquidity needs and that interest rates will change over time. Buying a five year CD with a 0.85 percent interest rate may be attractive today, but if rates rise in the next couple of years, you are locked into that 0.85 percent interest rate until maturity. An alternative is to use a “laddering of maturities” strategy. For example, instead of buying one five year CD, buy equal amounts of one, two, three, four and five year CDs. As each CD matures, you then reinvest the proceeds into a five year CD. While you would not have as high of an initial rate, over time all your funds would end up in higher rate five year CDs and you would have annual liquidity of one fifth of your funds. If rates rise, you would take advantage of the higher rates with new purchases. If rates fall, you still have the initial higher rate CDs that you already own.

CDs offered by banks and thrift institutions are insured by the Federal Deposit Insurance Corporation (FDIC). There are ownership rules applied to determining the insurance limit and you should thoroughly investigate these rules if you are considering investing large amounts with a single institution.

Stop by a local Arvest Bank to learn about your CD options.

Tags: Financial Education
Julie Myers on 4/13/2015 at 8:53 PM
It sounds to me like certificates of deposit are really great for investments. I have been trying to find some good ways to make investments, and it looks like there are some good benefits for having these certificates of deposits. You do a good job of explaining what they are, but I would like some more information on them before I get some. Do you think it would be best to talk to a financial professional about it to get more details on it? Thanks for the post!
Arvest Blog Admin on 4/13/2015 at 10:03 PM
Julie - Thanks for your interest. Please email your contact information and location to interact@arvest.com so we can connect you with someone who can assist.

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