As with high yield accounts, part of the secret behind getting higher returns is working with so-called “online banks," because unlike traditional banks, online banks do not have the expense of supporting branches and therefore can offer higher returns. But CDs ratchet up returns higher than high yield accounts – something worth looking at.
Here is a short comparison of the rates on one-year CDs that you can get from some major traditional banks versus online banks:
Traditional banks offering, currently offering .07 to .35 percent for one-year CD’s
- Bank of America .07 percent
- Chase .05 percent
- Citibank .15 percent
Online banks offer higher rates: 1.25 to 2.07 percent for one-year CDs
- Ally Bank 1.85 percent
- Barclays 2.05 percent
- Capital One 2.0 percent
By comparison, high yield accounts with online banks are at about .25 to .30 percent lower than that of the CDs. For an account with $10,000 total, that would amount to a difference of just $25-30 annually, so the big bounce in your passive income comes primarily from moving from the traditional bank to the online bank.
Pros and Cons
Now one of the disadvantages with CDs is that they are not liquid – at least not without penalty. So, you will not realize the return if you pay a penalty, but you can find a way around needing the money by working out a strategy of holding CDs that expire periodically so that you will always have a significant amount available in any brief period. Here is how it might work:
Buy one-year CD’s every quarter for a year, and then roll over into a new one-year CD upon expiration. For example, if you have $10,000, buy a $2,500 CD every 3 months for a year, and then begin the rollover strategy.
You can also do it monthly for shorter term liquidity. For example, let’s say you just bump up that $10,000 to $12,000 and buy a 12-month CD every month for a year. Then you will be taking advantage of the higher rates a one-year commitment provides, and you will be able to liquidate monthly if needed. You’ll also have the interest coming in on all 12 every month.
Set up a scheme that suits you – like 24 two-year CDs every month, or 20 five-year CDs every quarter, or some other combination that better suites you. Just be aware that in general, the longer the term, the higher the right. However, note that CDs under a year, like 3/6/9-month CDs can have much lower rates, so you will need to shop around. If you can do the longer-term CDs, also study the rate differences, as often there is an optimal position – could be 3 years, 7 years…where you get the most return for length of time
Are you thinking about creating passive income for a rainy day as a project manager? Have you investigated CDs as an alternative to what you are doing currently?