CD Rates

by Mr. Checking

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CDs Background

A CD, otherwise known as Certificate of Deposit, is a method of investment that appeals to people who do not wish to take risks with their investments. While similar in nature to personal savings accounts, they have a more well-defined timetable. A CD is an agreement between the investor and the bank or a credit institution to deposit a certain amount of money for a fixed time period, with the understanding that this amount will not be withdrawn until maturity is reached. Depending on personal choice, the maturity on a CD may be as brief as just one month or as long as five to ten years. Obviously, the interest earned is determined by the length the time the money is invested for. The longer the CD time period, the greater the interest. In return for this guaranteed deposit, the bank offers a higher rate of return than the standard savings or checking account.

The significant factor in acquiring CDs is to plan resources appropriately. Since CDs can be purchased for pretty much any length of time, it is essential to plan according to needs. Figure out when the cash will be needed and then buy the CD for that duration of time only. Should the need to take the money out of the CD arise before the date of maturity, hefty fees will be incurred, usually in the form of having to forfeit the interest earned.

Drawbacks of CDs

The biggest drawback of a CD is the fact that there is no liquidity. The cash invested in a CD is blocked and it can’t be touched without have to pay penalties. So CDs are only good when one knows they will definitely not need the cash for the invested time period. The second drawback is that a CD will not earn as much as, say if the same amount of cash were placed in the stock market for the same amount of time. Finally, CDs are invested at a fixed rate of interest, meaning should the interest rates increase during this time period, the investor will not be able to capitalize on it .

Benefits of CDs

The greatest advantage a Certificate of Deposit offers is the fact that it is a very risk free investment, especially when entered into with an FDIC insured institution. In such organizations, the CDs of up to $250,000 are insured, guaranteeing that the amount will not just disappear should the organization become insolvent. CDs also offer a higher rate of return, compared to the average savings account. Depending on agreed upon terms, CDs can be paid as they accrue or be added to the principal allowing for a greater return.One can invest as little or as much as they want. It is also possible to ladder the CDs purchased. This means to invest in many CDs that mature at specified intervals. For example, if CDs are invested in every month for a period of one year, then there will be CDs maturing every month assuring an additional income every month.

Strategy of CD Investment

According to the Bureau of Labor and Statistics, the rate of inflation for the year ending January 31, 2011, was 1.6%. This means that if one can find CD rates over this amount then they would be staying ahead of inflation and the investor will have more purchasing power. If, however, the CD interest rate is below this mark, then the investor loses purchasing power and there is no point to the investment. Unfortunately, the short term CD rates are not clearing this mark currently. Only the term (five year) CDs clear this and then just barely. So the trick to stay ahead of inflation is to go long term. However, if inflation continues to increase, then one can end up in a hole for long term. The other option is to go with jumbo CDs, ones in excess of $100,000. While premiums are small now, with rising inflation everything helps. It pays to take the time to shop around. With larger amounts of money, every little increment in the interest rate helps.

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