In the current low interest in environment talking about high yield CD account rates seems like a bit of a joke. While certificates of deposit are one of the most boring ways to earn interest, they can be a useful way to get slightly better interest rates especially if you look into long term CD Ladders.
You can open a CD from any bank or credit union but, just like high interest savings accounts, you get the best rates from the online banks. Their low overhead allows them to offer significantly better rates than your bricks and mortar locations.
Best Online High Yield CD Accounts
Each of these online banks has very easy terms for investing in their certificate of deposit accounts. I will give a few details of the accounts like minimum deposits. If you want to learn more about CDs then we will cover the basics just after our list of the best high interest CDs.
BBVA Compass Bank
- Minimum deposit – $500
- Online accounts have the option of opening a one year or two year CD
- FDIC Insured
BBVA has the advantage of also having bricks and mortar locations in Alabama, Arizona, California, Colorado, Florida, New Mexico, or Texas you will have additional options.
- Minimum deposit – $2,500
- The most flexible terms with anywhere from 3 months to 10 year CD account terms.
- FDIC Insured
Discover does not have any bricks and mortar locations so everything is done online.
Capital One 360
Capital One CD accounts give you lots of options and have some of the best customer service in the banking industry. Their CDs follow suite to their savings and checking accounts with their normal customer friendly options.
- Minimum deposit – $0
- six month to five year CD account terms
- FDIC Insurerd
I use Capital One 360 for my personal savings account and would consider them for a CD because of convenience. However, if you are looking for the best rates then you should look at the two above. Capital One usually comes in a little lower.
What is a CD Account Anyway?
Depending on how long you have been using a bank you may or may not have heard of a CD. It stands for “Certificate of Deposit” which sounds a lot like a savings account and in fact is very much like a savings account. The difference is when you put your money in a CD you lock that money in for a specific period of time, called a term. If you want to withdraw your money early you will have to pay a penalty, which varies from bank to bank
In exchange for agreeing to keep you money with the bank for this specified period of time the bank agrees to pay you a higher interest rate than if you just kept it in a savings account.
Best Features of a Certificate of Deposit Account
The best feature is the slightly higher interest rates. While these are not going to make you go telling all your friends how great of a deal this is, it is a good deal when you consider the next best feature, FDIC insurance.
FDIC insurance was created to protect people’s deposit accounts at banks, in the event that there is a bank failure. Your CD account is protected up to $250,000 so there should be no worries that your money is safe. These are the safest investments you can make.
CD Account Strategies
There are two main CD strategies and they have two fun names, the ladder and the barbell.
CD Ladder Strategy
The most common strategy for long term investing in certificates of deposit is the CD ladder. The concept is pretty simple. You want to be able to take advantage of higher interest rates. To do this you have to take out a CD that is for a longer term (more years) to get the higher interest rate. On the other hand you do not want all of your money locked up for five years or more, especially if interest rates were to go up and leave you locked in at the lower interest.
So to set up a ladder you take out several different CD accounts each for a different period of time. When one CD reaches maturity you take out another CD that is the same as your longest term CD. To help clear that out here is an example:
You have $5,000 dollars to invest so you take out five different certificates of deposit of $1,000 each. The first will be for a one year term, the second for two, and so on until the fifth is for five years. You get a little better interest on each one for the longer terms.
At the end of the first year your one year CD will come to maturity and you can withdraw the money with no penalty. You now move this money to the top of the ladder. To do this you take out a new five year CD with the money that was just freed up. Each year when a CD comes to maturity you take out a new five year CD. This way you have a new CD term that is expiring every year and getting to take advantage of the higher interest rates.
This way you get the highest interest rates and are only one year away from access to part of the money.
CD Barbell Strategy
I learned about the CD laddering a long time ago and thought it a good idea, especially for those in retirement who cannot afford to suffer investment losses. The barbell is designed to give people a chance to take quicker advantage in the event that interest rates were to go up.
With the barbell, instead of spreading out your investments evenly over short, medium, and long term maturities you invest in only short term (less than 2 years) and long term (5 years or more) maturities. If you were to look at your investments graphically you would have a large sum in the short term investments and a large sum in the long-term investments, with no money in the intermediate terms, giving you the appearance of a barbell.
This gives you more liquidity in the short term and since the CD rates, at the moment, are not that different between the one and three year maturities, You really are losing very little.
The Bottom Line
If you are looking for an investment that is guaranteed to go up in value then a high interest CD account is a great place to start. These investments are not going to set your retirement world on fire, but they are SUPER stable and can provide a good hedge against the ups and downs of the stock market if you want to include them as a small piece of your portfolio.