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Is There a Safe Way to Invest? Yes, Actually There Is

When considering investing your money you want an option that is going to be safe. But at the same time you want to make money, to have a return. That leaves two options: the savings account and the CD. A savings account, while giving you anytime access, generally has a lower interest rate. Whereas a CD, despite not allowing anytime access, you can have a better interest rate. And a better interest rate means more money for you.

Once you have decided on a CD, you give a large deposit of money to the bank or institution for a fixed amount of time at a predetermined interest rate. The principal behind a CD is that you are allowing the financial institution to use your money and they pay you interest for using your money. But this is also why withdrawals against CDs, generally, are not done. The penalty for drawing against a CD will range from losing several months of interest to closure of the CD; withdrawing from a CD should only be done if you have no other options available. Otherwise, once you have opened your CD, your money accumulates interest, and you will receive that interest plus your deposit back at the end of the term of the CD. Terms on CDs can be three, six, or nine months, or one to five years.

The aspect that makes CDs safe is that they are insured up to $250,000 by the FDIC, or the NCUA in the case of a credit union. This is not like the stock market in which you can not only lose any money you make but also your investment as well if the market makes a downward turn. With a CD you do not have the fear that you will lose your money. This is what makes a CD a safer but higher yield investment than a savings account.

Below you find the questions you need to ask when looking for a CD and also different types of CDs.

Questions to Ask

When will I get paid?

Since a CD is to make you money, you will want to ask when and how the interest will be paid to you. In some cases the interest may be deposited into your checking account, a check may be issued, or the money can be reinvested in the CD.

What happens when the time is up?

The institution that you have your CD with usually contacts you before the term is up to find out what you would like to do with your investment. You may choose to reinvest it, or to close the CD and withdraw your money and interest. By mindful that some institutions may try to automatically rollover into a new CD. To avoid this keep an eye on your CD: know when you term is up; if the institution does not contact you, contact them; be sure of the terms of your CD, check what conditions they have for when the CD matures.

What does callable mean?

Callable is when the institution can close your CD and return your money before the CD has matured.

How much of my CD is insured?

As long as the total amount you have at any one institution is no greater than $250,000 then all of your investment is insured. For example, if you have $248,000 at your current bank, and you want to invest $3,000, you will want to look for CDs at other institutions so that all of your money is insured. In another example, let’s say you have only $150,000 at your current bank, and you are only going to be investing $2,000, then you would be insured if you invested at your current bank if they have the best CD option to suit your needs. Remember, as long as the total amount you have at a single financial institution does not exceed $250,000 your money is insured.

Different Types of CDs

There are other CDs available that might yield a higher return for you or whose terms are a better match to your lifestyle. Always make sure you research the terms and conditions of any CD you are thinking of investing in before you deposit your money.

Add On CD:

This is a CD that gives you a bit of flexibility if you are hesitant to invest all the money you desire at once. Say you have $2,000 you want to invest. Initially you only want to open a CD with $1,500, but you would like the option of adding the remaining $500 at a later date. Consider looking at Add On CDs because they will allow you to make deposits after the CD has been opened. This CD is available for both direct deposit and variable rate CDs, however, check the terms and conditions carefully as there may be certain restrictions that apply to the amount or number of deposits, or to the interest rate.

Brokered CD:

A Brokered CD is one in which you do not own the entire CD. Instead a brokerage firm collects investments from various investors to use to open a CD with a larger deposit; think of it as you only own par of the pie, not all of it. The advantage to a Brokered CD is that the interest rate is generally higher than rates offered on a direct deposit CD. There are disadvantages too. The FDIC will only insure up to $100,000 per investor, so you will have to be mindful that you are not investing more than that to make sure that all of your money is insured. Also check what institution they well be investing at. If they are investing at an institution in which you already have $250,000 placed, look elsewhere because the FDIC will only cover the $250,000 you already have placed; any other money invested, whether through a Brokered CD or otherwise, will not be insured. It will also take longer, in the event of a bank failure, for the FDIC to pay on a claim from a Brokered CD; what could be a week to receive your claim on a direct deposit CD claim could be up to two months on a Brokered CD claim. Also in the event of a bank failure, your return can be effected. A direct deposit CD will generally be allowed to mature at the original interest rate. Whereas the interest being paid on a Brokered CD will usually stop.

Bump Up CD:

This is an option to be on the look-out for. In a Bump Up CD, the institution will allow you to have the interest rate of your CD raised. The good thing about having this option is that the amount of money you can earn through the interest rate will increase. However, the length of your CD will not change, but at least for the last part of your term your CD will be making you more money.

Liquid CD:

This type of CD allows for some flexibility, and, during current economic conditions, might be the middle ground that you are looking for. This is the one CD that will allow you to make a withdrawal without penalty. However, there are likely to be limits to how much you can withdraw and how many times you can make a withdrawal. It is always best to make sure you have a complete understanding of those withdrawal terms before opening your CD.

Step Up or Step Down CD:

You’ve heard of credit cards that allow you a lower interest rate for a set period of time, after which, the interest rate goes up to the predetermined regular amount? This is similar to how a Step Up or Step Down CD works. The example above would be an example of a Step Up CD, in which the interest rate starts lower and then rises to a predetermined rate. A Step Down CD is one that works in an opposite manner; the interest rate starts start at a higher point, and then after a fixed time, drops down to a predetermined rate.

Variable Rate CDs (or Indexed CDs):

These CDs are tied to the stock market in some manner, usually by the Prime Rate, Dow Jones, or Consumer Price Index. This is as close to the stock market that you can come and still be safe. At the end of your CD’s term you will get the amount you invested back. However, the amount of interest you receive is determined by the difference between the stock value at the time you opened the CD and when it reached maturity. If there was an increase of 5% then you will make 5% on your investment. Conversely, if there was a decrease then you haven’t made anything extra, but at least you will be getting your original investment back.

Whenever looking to invest in a CD think not only of how much money you want to make but of your lifestyle as well. You want a CD that is going to work for you and your life, rather than add complications. If you want a CD for the higher interest rate but want to be able to withdraw from it, check into Liquid CDs. If you want the possibility of a larger return look for a Brokered CD. If you are just getting started with investing, perhaps stick with a basic three or six month direct deposit CD, and see how you like it; this way you will make some money without your original amount being tied up for a long period of time. No matter what type of CD you are looking for always check the terms and conditions before depositing your money. If you fail to do so you might end up having to make withdrawals and the penalty could make the difference between making money and just tying up your money for a fixed period of time.

You might be aware of the fact that the Federal Deposit Insurance Corporation (FDIC) fairly recently changed its limits on the size of deposits that it will insure. Individuals are now allowed to have a quarter million dollars insured per bank, and married couples may cumulatively have five hundred thousand dollars. This is up from one hundred thousand dollars per individual and two hundred thousand dollars for married couples. This change is said to be to be temporary, but one tenet of the banking industry reform bill currently being considered in Congress would make it a permanent change.

People with their savings in certificates of deposit continue to lose money due to the record low rates that have been plaguing the market. As of last month, the national average rate for both CDs and money market accounts had bottomed out around one and a third percent – a record low for the last decade. Bankrate.com, a perennial rate watchdog site, noted that, in their analysis, yields on these types of investments have not been lower at any point in the last twenty-five years.

Average consumers tend to really like CDs. Certificates of deposit tend to be a form of saving that is widely understood, unlike some other kinds of bonds. They couple the coupon and maturity date aspect of savings bonds, but with a little less guesswork involved. The FDIC also guarantees CDs, which makes them very attractive to gun-shy investors. One could call CDs the “feel good” way of saving your money.

Seasoned investors know all about CD ladders. This is the term for what happens when consumers take advantage to great CD rates to create a “ladder” of investments through a mixture of short-term and long-term certificates. In truth, they are a little bit complicated of a concept for the average Joe to understand, and tough to create successfully on one’s own.

I personally don’t know anyone who isn’t thoroughly sick of those E*trade commercials by now. You know the ones I’m referring to – the ads with the talking baby. This digitally-assisted tot is preternaturally glib when it comes to financial matters, but banking experts are cautioning consumers that you definitely shouldn’t choose an online investment firm based on the relative cuteness of its mascot (which goes for car insurance, too, but that’s a story for another post).

Enjoy another installment of the Bantime Credit Card Encylopedia. Fall from relating solely to the business of credit cards, the encyclopedia also contains important information about mortgages, insurance, loans, and other forms of banking. Soak in the important financial knowledge, and enjoy!

Consumers continue to be quite disappointed by the rates on certificates of deposits. Industry trade site bankrate.com showed this week that across the country the average six-month CD rate was still a pathetic 1.4 percent. That means that, in some places, the rates are actually as low as half of one percent.

A banking division of GMAC is being taken to task for offering interest rates that are allegedly excessive in an effort to bring in new depositors. Ally Bank is a subsidiary of GMAC. GMAC, of course, was the dedicated financing division of (the now bankrupt) General Motors before being purchase in part by Cerberus Capital Management LP.

Slowly, surely, the United States is again becoming a nation of savers. The country learned the value of saving the hard way after the Great Depression of the 1930s, but our financial habits have been on a long, slow decline since then. The contemporary recession is seeing many consumers finally making the smart decisions to cut up their credit cards, stop blowing money on frivolous expenses, and set some cash aside for a rainy day.

Well, there’s some good news and some bad news about investing your money in certificates of deposit (CDs) these days. On one hand, you need not worry as much about the FDIC limits on your deposits. On the other hand, rates are still in the gutter. You win some, you lose some.