I admit, I have not always been the biggest fan of CD's. I don't mean those shiny circular discs once worshipped as the future of the music industry; I mean CD's as in Certificates of Deposit. For me, CD's seemed too restrictive; I had to keep my money in one spot, even if a better deal came about, and if I withdrew my funds early, that withdrawal came with a penalty attached to it. That penalty made me gun-shy when it came to putting my cash in CD's. I favored bonds and conventional savings accounts for a frightfully long time. Yet, with a little knowledge (coupled with some basic math), I am gun-shy no more.
A Slow Climb
I began toying with a CD for my emergency fund about a year ago. When I did, I put $2,000 in a 2.74 percent yield CD. At the times, most run of the mill savings accounts were only offering one percent APY; I figured the higher yield couldn't hurt. As it turns out, I was right.
A New School of Thought
Part of my CD-phobia came from growing up in a household that held fast to conventional schools of thought. My grandparents believed in buying bonds, and consequently, so did I. However, I was never over the moon about the rates of interests on bonds. One afternoon, pen and paper in hand, I got to thinking about CD's versus bonds and conventional savings accounts based on my leap of faith with my recently acquired CD. What I found changed my mind, for good.
A Revelation
I quickly realized that CD's had two things my bonds and my savings account didn't. They offered me a higher rate of interest (obvious benefit), but they also offered me a lower interest rate risk. What do I mean by this? It's simple. CD rates are constant; they don't fluctuate with the market. If rates went up, it would be easy for me to break the CD, pay the penalty (and the penalty was far less than I thought) and buy a new CD. In contrast, if rates went down, I was not losing money like I would be if I stuck with a bond or in a regular savings account, where the interest rates go up and down like a fiscal yo-yo. Buying a CD meant that I was buying into a stable investment with less of a penalty. In my mind, CD's started to make sound financial sense.
Reallocating My Retirement Outlook
When I realized that CD's were (ultimately) a better deal than my old school investments, I added them to my Roth IRA. Currently, about 60 percent of my investments are firmly planted in CD's, but I still add bonds, investments and even the occasional, archaic regular savings account into the mix -- hey, it beats putting my money in my mattress.
My $25,000, 12-month 2.5 percent CD (compounded daily) earns about $600 annually. Far better than the $250 I'd be earning by sticking with my one percent APY savings account.
My Strategy
I'm sticking with 12 month, and 24 month CD's because I'm comfortable with their rates of interest, because they keep my money flexible enough to keep me content and because those time-frames don't make me nervous about my money being inaccessible.
As I looked over my annual account statements since adding CD's to my portfolio, I've increased my earnings by nearly 80 percent, compared to this same time in 2011. If you ask me, that's a compelling reason to stick with CD's for many years to come, and it's why I'm adding these often overlooked, versatile investments to my retirement portfolio.
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