How to invest money safely? If you don’t like risk, and investing in bonds or mutual funds scare you it will be best to invest your money in CDs. They are among the safest forms of investing money right now. The safety is guaranteed by the Bank Guarantee Fund, which in the case of the collapse has to return money to investors, at least part of the savings. In finances, unfortunately, what is safer, is also generally less profitable. Therefore, money deposited in a bank for a year typically earns less than in the stock market within a few days.
Fixed or variable interest rates on certificates of deposit?
Interest rate of investments is always counted annualized. Banks offer two types of deposits with interest: variable or fixed. The first one is raised and lowered rather frequently along with changes on the financial market. The second type of interest rate is maintained throughout the period for which you agreed to put up the money. For years, inflation in US decreases, and with it, unfortunately, the interest rate of CDs in banks. Anticipating this possibility, bankers typically offer fixed interest rate lower than the variable one.
Let’s suppose that you invest money in the CD offered by bank for two years. After half a year, you need a cash for a new car because there’s no sense to repair an old one. When you abolish a CD investment you will lose interest rate. At most, accrued interest will be low (it is usually written in the CD contract), as for the contributions paid on each request. So be sure to ask the bank representative (or read the rules carefully) how high the interest rate will be in the event of closing your account.
How to invest money in 2015 safely?
If you have a larger amount of money it is better to split it into several portions. If after some time you will find that you need some money then you’ll close only one of the CDs, and the rest of your savings will be still working on. It often happens that investing in CDs for a year or two years is less profitable than depositing it for half-yearly or three months, extendable for another, similar periods. Thanks to this solution you can rotate the money, and thus immediately invest the interest earned.
What is the capitalization of interest on the CDs?
The interest rate on the certificate of deposit is not everything. You should also take into account the frequency with which the bank calculates interest, because the more, the better. You will then have a constant supply of money before the end of the deposit. Banks typically charge interest after a certain period of time for which you entrust them your money. It is the capitalization that makes that effective interest rate is different than the nominal, specified in the contract. Let’s assume that the half-year CD deposit interest rate is the nominal 3% per annum. After half a year for every $100 you get $1,5 minus taxes. After adding them to the capital (total $101,5) after the next six months you will receive $102,52. So the effective interest rate was therefore 2.36%. It is different with loans – effective interest rate is lower than the nominal rate and therefore banks emphasize it in their advertisements to attract costumers. There are also dynamic CD deposits, in which the interest rates are dependent on the perios after which you take out your money.