I just received an email from Discover (where I have my high-yield savings account) offering me 5.20% interest on a 12-month certificate of deposit.
It’s been a long time since CD yields were this high, and I fear they won’t last much longer. I personally have a higher risk tolerance than most, so CDs aren’t really my thing.
However, I know many people who believe CDs are risky. For those of you, it’s time to take the plunge into the high-yielding deep end.
Getting started with CDs. Why would you want to invest in a certificate of deposit? First and foremost, you get to lock in a solid rate, typically higher than a high-yield savings account.
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In this case, Discover asks you to deposit $2,500 to obtain the 5.20% rate over twelve months. That will net you $130 over the year. Remember, you’ll have to pay federal and state taxes on these proceeds.
The Federal Deposit Insurance Company (FDIC) insures CDs up to $250,000, giving you another layer of protection against losing your principal.
If you are a retiree, preservation of capital may be the highest investment goal on your list. Again, I know young people who feel the same way.
CDs don’t have massive penalties for withdrawing early. You usually forfeit some of the interest you received. This makes CDs a good idea for your high-yield emergency fund.
You can also establish CDs at banks that you trust. I have been with Discover for almost five years, and I would buy my CDs from them (if I were in the market).
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Let’s add a little more money. Let’s increase the CD amount from $2,500 to $20,000. How would that change our interest payments?
At $20,000, we would receive $1,040 in interest over the year. The bank usually pays this amount monthly to our account.
This is where things get interesting (no pun intended). How do you spend or reinvest your interest payments? My favorite idea is high-yield CD reinvesting.
I previously wrote about “High-Yield Bond Reinvestment” and “High-Yield Index Fund Reinvestment,” so it’s time to do the same for CDs.
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What is high-yield CD reinvestment? It’s the concept that you want your money to work harder for you than ever. The best part is your initial principal is still safe inside the CD.
Let’s look at ways to grab over 5% yields across various capital markets. Let’s start with the bond market and US Treasuries.
The Treasure in Treasuries. US Treasuries yield similar to certificates of deposit, but they give you one major difference—longevity (or duration).
I don’t want to trade my certificates of deposit every year. I prefer to lock in rates for 30 years. I can do so with Series “I” Bonds, Treasury Inflation-Protected Securities (TIPS), and 30-year Treasury Bonds.
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You can also purchase Treasury Notes in 2, 5, and 10-year increments. Either way, you can use your interest payments to buy longer-term bonds. Interest rates won’t stay this high forever, so it’s best to lock in some goodness for later.
Dividend-paying stocks. I know the stock market may be out of your comfort zone, but what better time to invest than now?
Dividend-paying stocks compete directly with Treasury and CD rates. When risk-free assets like CDs and Treasuries yield 5%, dividend stocks must increase their yields by lowering prices.
This creates the perfect scenario for investors to use their CD payments to dollar-cost average into dividend growth stocks like McDonald’s (MCD), Starbucks (SBUX), and Mastercard (MA).
I have been buying alternative asset managers like Blackstone (BX) and Brookstone Asset Managers (BAM) recently. They provide high growth and high yields, a win-win for my portfolio.
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If you are new to dividend investing, I recommend starting with a brokerage like STASH. They will hold your hand through the process.
Is it time to start options trading? I know trading options is far outside of your comfort zone, but there is a reason I mention it.
Earning 5% per year sounds like a lot; however, you’ll never achieve the financial result you want if this is your best strategy.
What if you could achieve 5% per month? With $1,000, you could trade a few options every week. I trade long strangles to give me passive income for the weekends.
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With $1,000 seed money, you could potentially earn $100 per month trading long strangles. This could give you the same returns ($1,000 per year) as your $20,000 in CDs; however, you’ll only be tying up $1,000.
Options trading is for a small minority of individuals, but I believe it can help a much greater audience if they take the time to understand its merits.
Invest in real estate. You probably can’t buy a house with $1,000, but you can invest in Fundrise Real Estate Investment Trust (REIT).
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Fundrise should yield around 3-6%, giving you growth and diversification. Investing $1,000 into Fundrise will provide you access to the real estate market that will remain hot for the foreseeable future.
Start a business. You can use your $1,000 as seed money to purchase an ATM or vending machine. Or, how about you use it to set up a room rental in your house?
You can also use it to become a content creator. You can pay for web hosting, a blog, a new camera, or take an online writing course.
There is no better investment than yourself. Ensure you always keep your mind growing so you can see a world of success and income.
Invest in family moments. Perhaps the best way to spend your money is with your family. Once you have a solid financial foundation, you can use your interest payments for fun!
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You can use $100 per month to go to special events and not feel guilty about spending money. $100 can go a long way with proper planning.
I love to take my family to Ruby Tuesdays when I get some extra passive income. Once you understand the magic of someone else paying for your dinner, you’ll see the world in a different light.
Conclusion. Now is the time to purchase a certificate of deposit. However, don’t let this be the last stop on your investing train ride.
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The world of investing encompasses many avenues (bonds, stocks, options, business, real estate, family, and yourself); you’ll just have to discover what is right for you.
I love the idea of CDs in an emergency fund or as a way to save for college. I don’t like them as your highest investment strategy.
So, let’s use CDs as a stepping stone to bigger and better things. Trust me, your mind can create money from thin air if you train it. Certificates of Deposit are just drops in a much larger pond. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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