Today's article is written by guest blogger Jim of Bargaineering.
If you've saved up a few dollars and aren't sure if you should put them in the stock market or stick them in your mattress, let me give you another suggestion: put your funds into a certificate of deposit (CD). CDs are deposit accounts at a commercial bank that have a fixed period, or term, and offer a fixed interest rate of return that will exceed that of a savings account. You will have to keep your funds in the CD until the term ends (though you can withdraw early if you are willing to pay a small penalty) but you are guaranteed that rate for the length of the CD. You trade flexibility for a guaranteed rate of return, something you can't be assured of in the stock market.
So, why a CD right now?
- Great rate of return: Some of the best CD rates available from the top online banks are above 3%. What is your savings account giving you right now? Probably not above 3%, unless it's in a high interest savings account.
- Guaranteed rate: 3% guaranteed may not sound all that wonderful but the stock market can give you -5% just as easily as it can give you +5% on any given day. Getting 3% for the next 12 months is a nice stable base, save a little in a CD and then use the rest in the stock market.
- FDIC insured: It doesn't matter if your bank collapses or if it's well capitalized and sticks around, FDIC insurance protects you up to $250,000 per bank and CDs are included. You can't say that about many other investments.
- Easy to open: Once you setup an account at the bank, opening CDs is a cinch. All you have to do is tell them what term you want, where the funds will come from, and in moments you will have a CD open and earning you a higher rate of return.
CDs fell out of favor, especially when the stock market went gangbusters or when money market rates were high, but nowadays the guaranteed return is something that is both alluring and comforting. Check them out the next time you're in the area!
Jim writes about personal finance at Bargaineering.com, a leading personal finance blog. If you enjoyed this article, consider subscribing to his RSS feed or joining the conversation in the Bargaineering Forums.
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Originally posted 2009-02-05 05:08:38. Republished by Blog Post Promoter
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2 comments ↓
You bring up great points about CDs. If you could make 3% on your CD vs. -15% on you equity investments, which would you pick? Investors are using the CD and savings accounts as a way to wait out the volatility. There also people out there who aren’t looking for big-time investments and are happy with the CD because of gains over time averaging out as a net gain to inflation.
Although, banks are FDIC insured, with so many in trouble, more and more people are looking at the health of the bank. After all, a 3% rate doesn’t do you much good if the bank is shut down 2 weeks after you open it (think WaMu).
The FDIC posts financial information on all insured banks. Look for a E/A (equity to asset) ratio of 7% or higher, a profit (unless it is a brand new bank), a total risk based capital ratio of 10% or higher, and check out the status of their loans.
If the bank looks real unhealthy consider accepting a lower rate elsewhere with a healthier bank.
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