Investing in CDs

Lets go over investing in CDs! But first...

What is a CD?

CD stands for certificate of deposit. It is a loan that you give to the bank and they agree to pay you back your original loan amount plus interest on the maturation date. Your money is also FDIC insured, so you can feel secure that the money isn't going to suddenly go poof.

You can access the money in a CD if you wish to, but you will have to pay a penalty. Its really not worth you getting the money out of a CD unless you really need it.

Why would I want to invest in a CD?

Safety, safety, and safety. Since its FDIC insured, you know you aren't going to look at your account and see a number smaller than before.

CD's usually give a slightly better return than money market accounts - the only other high interest account that is FDIC insured.

What are the disadvantages of investing in CDs?

If inflation gets higher than your CD interest rate, then you will actually lose value.

Also, you're locked into your rate, so if interest rates rise while you're in the middle of a CD term, you'll be earning sub-par returns.

How do I go about investing in CDs?

You could go to cdrates.bankaholic.com or bankrate.com and search for the highest rate. But, you don't know what your customer service experience will be like. Since this is not money you're looking to make big gains on anyway, saving yourself frustration and wasted time in the future is probably worth a few less dollars in returns.

For slightly lower rates, but still competitive, I can recommend two banks that either I have personal experience with or have multiple recommendations from. The first is EmigrantDirect.com. I have personally used them and their division DollarSavingsDirect.com and have never had a problem. I can also vouch that their service is dead simple to use and they are quick to transfer money from and to my accounts.

The second bank is ING direct. I know many people that use them and give them high accolades in ease of use, simplicity, and customer service. Their customer service gets rave reviews. They also seem to have several neat little features that you wouldn't think you'd want until you use it.

Emigrant Direct's rates are typically better than ING Direct, but ING Direct gets better marks for customer service and features. I prefer Emigrant Direct, but its a close call and I'll probably try out ING Direct eventually.

What's the difference between APR and APY?

Both are often quoted to you and the difference can be confusing. Basically the APR (Annual Percentage Rate) is the yearly interest rate and the APY (Annual Percentage Yield) is the return you'll actually make. This happens because the interest isn't always compounded just at the end of the year. For example, if the APR is 12% and it is compounded monthly, then you'll earn 1% every month, but the compounding interest will make the total interest rate for the year 12.7%. So, in reality, you should look at the APY of 12.7% for a reflection of the reality of the gains.

How should I go about investing in CDs?

If you plan on using CDs as a major part of your investing and saving plan, I recommend the CD ladder strategy.

return from investing in CDs to safe investing

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