Follow These 10 Steps for Investing in Certificates of Deposit

Barbara Marquand | guest writer for GoTalkMoney

The ABC's of CDs: 10 Tips for Smart CD Investing

Certificates of deposit have grown more complicated in recent years, so it pays to do your homework before investing.

First, a primer: A CD is a time bond--you agree to deposit money in a bank for a certain amount of time, and after the CD matures, you collect the original deposit plus the accrued interest. CDs are lower risk than stock market investments and they offer higher interest rates than regular savings accounts.

Sound simple? Sure, but today CDs come in more varieties than ever before. Here are 10 tips for CD investing:

1. Define how CDs fit into your financial plan. What are your goals? CDs can be an important part of a portfolio, but keep in mind the risk that inflation may outpace CD interest earnings.

2. Understand CD interest rates. What is the rate, and is it fixed or variable? How often does the bank pay interest--periodically or at maturity? If the interest rate is variable, when and how does the rate change? Some CD variable rates step up or step down to pre-determined levels at set times. Other CD variable rates rise or fall periodically according to performance of a financial index, such as the prime rate.

3. Double check the CD maturity date. Read the fine print to make sure you understand when the CD matures, and time your CD investments to your advantage. Don't go for a two-year CD if you think you might need the cash in the next 12 months.

4. Investigate CD special features. Some CDs, for instance, offer a death benefit, so your heirs can redeem the CD without paying a penalty.

5. Learn the risks of callable CDs. Some long-term CDs are "callable," which means the bank (but not you) can terminate--or call--the CD after a certain amount of time if interest rates fall. When the CD is called, you get the original deposit and any accrued interest. Callable CDs, which often promise higher yields than other CDs, may be a good idea for some investors, but the North American Securities Administrators Association warns people to be wary. Make sure you understand a callable CD's maturity date. For instance, "one-year non-call" means the bank can't call the CD in the first year; it doesn't refer to the maturity date, which may be many years from now.

6. Keep CDs within federal deposit insurance limits. FDIC insures deposits of up to $250,000 per person at each institution. That limit will revert to $100,000 Jan. 1, 2014, unless Congress intervenes.

7. Know your CD broker. You can buy CDs directly from a bank or through a broker, who can negotiate a higher interest rate in return for bringing deposits to a financial institution. Check out the broker's background and work only with reputable professionals. Find out how the broker keeps records to assure your CDs are covered by federal deposit insurance.

8. Beware of "too good to be true" CDs. Thoroughly investigate any CD offer that promises out-of-this-world yields. If it seems too good to be true, it probably is. For evidence, look no further than the case of Texas financier R. Allen Stanford, now on trial for bilking billions from investors by hawking phony CDs.

9. Understand CD early withdrawal rules. Some CDs don't allow early withdrawal, while others charge a penalty. In some cases you can avoid early withdrawal penalties with brokered CDs. A broker may sell your CD when you're ready to withdraw, and you pay no penalty to the bank. However, you still might lose money if interest rates have risen and the broker has to sell your CD at a discount.

10. Shop for the best CD rates. Check rates online here for a variety of CDs -- from one-month CDs to seven-year CDs.

CD investments aren't "no brainers," but they can be safe and simple when you understand how they work.


Joan Goldwasser • What You Need to Know About CDs • Jun 01, 2009 • http://www.kiplinger.comhttp://www.kiplinger.com/magazine/archives/2009/06/what-you-need-to-know-about-cds.html

Federal government • FDIC Insurance Coverage • May 22, 2009 • http://www.fdic.gov/news/news/financial/2009/fil09022.htmlhttp://www.fdic.gov

Kara Scannel • SEC Accuses Texas Financier of Massive $8 Billion Fraud • Feb 18, 2009 • http://online.wsj.com/article/SB123489015427300943.htmlhttp://online.wsj.com

North American Securities Administrators Association • NASAA Issues Top Five List of Investments to be Wary About • 0000-00-00 • http://www.nasaa.orghttp://www.nasaa.org/NASAA_Newsroom/News_Release_Archive/1742.cfm

Federal Government • Bank Find search tool • 0000-00-00 • http://www2.fdic.gov/idasp/main_bankfind.asphttp://www2.fdic.gov

Federal government • Certificates of Deposit: Tips for Savers • Oct 04, 2008 • http://www.fdic.govhttp://www.fdic.gov/deposit/deposits/certificate/index.html

Walter Updegrave • CDs That Sound Too Good To Be True • Apr 03, 2009 • http://money.cnn.com/2009/04/02/pf/expert/high_yeilding_CDs.moneymag/index.htm?postversion=2009040305http://money.cnn.com

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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