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Put Extra Money to Good Use, Consider a Certificate of Deposit

July 1, 2008

By: Jim Oosterman
Melrose Bank

Did you recently receive a bonus or an unexpected windfall such as an inheritance? Or maybe you just have some extra money sitting in a checking or savings account as an emergency fund. You may want to put that extra cash to work for you with a certificate of deposit (CD). CD's generally offer higher interest rates and annual yields than the typical savings account. There are many CD options to consider for meeting your financial needs.

Consider CDs
CDs are a good choice for those looking for a short to mid term investment with a guaranteed rate of return. CD terms generally range from a few weeks to several years. In most cases the longer the maturation period the higher the interest rate that you’ll be paid since your money will be tied up a longer amount of time. Generally the advice is that if rates are low, go for shorter time frames in case they rise. If rates are expected to drop on the other hand, select a longer time frame. Be mindful that there is often a significant penalty for early withdrawal so plan ahead to be sure you won’t need cash before the CD reaches maturity.

CDs are a wise instrument for the savvy investor of any age, since they offer a guaranteed return, preserve capital and are fully insured. The Federal Deposit Insurance Corporation (FDIC) insures CDs held at banks up to $100,000 per depositor. In Massachusetts, cooperative banks are also covered by the Share Insurance Fund (SIF), and mutual banks are covered by the Depositors Insurance Fund (DIF), both of which pick up where FDIC insurance leaves off.

Types of CDs
There are traditional CDs which pay a fixed interest rate over a specified period of time on a fixed amount of money deposited. Then, there are non-traditional CDs. Bump-up and variable rate CDs are two of the more common non-traditional types. Bump-Up CDs allow you to take advantage of a more favorable rate, should interest rates rise. You may sacrifice a lower initial rate for this privilege and if rates do not rise you will be locked into a lower than market rate for the term of the CD. Banks usually only allow one bump up per term, and some institutions may require the term to be extended. Variable Rate CDs adjust periodically based on market conditions.

If you have a significant amount of money you’d like to invest in a safe and reliable manner, consider laddering. For example with a $10,000 investment, you may choose to invest $2,000 each for terms of 1 year, 2 years, 3 years, 4 years and 5 years. At the end of every year, part of your money ($2,000) will come due. Then rather than cashing that money out, roll it over or reinvest that money in the term farthest out, in this case 5 years, getting the best possible rate (since the longer the term, the higher the return generally).

A laddering strategy allows you some short term access to your money and the ability to continually reinvest your money at current market rates. It protects your money against market fluctuations because you never have all your money tied up for a long term or at lower than market rates. CD ladders can be as long or short as you like. All laddering uses a similar principle—investments are spread out over time to reduce exposure to fluctuations in interest rates.

CD rates are set according to open-market competition among banks and other financial institutions. Check your print or online news outlet for current advertisements or visit individual bank websites to find out what is being offered. In addition, rate and product comparison tools offered by credible sources, such as are useful and easy to use.

One of the most inexpensive, secure and accessible resources you have at your disposal is your local bank. Some banks may offer their current customers the best CD rates if they already have a minimum investment at that institution. If you already have a banking relationship where you have substantial deposits, then you may find your best investment is right there.

James Oosterman is the Vice President of Melrose Bank. He can be reached by telephone 781-665-2500, online at or on Facebook at

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