Get the FAQs on CDs

Growing Stacks of Saved Coins

In 15 years as a financial planner, Delia Fernandez of Los Alamitos, CA, never thought she'd see the day when Certificates of Deposit (CDs) became a hot topic of conversation with her clients.

"The whole world of CDs has suddenly become more important," Fernandez says. "CDs are the best deal in town."

Long the dependable-but-dull component of most investors' portfolios, CDs became a prime safe harbor during the recent market turmoil by virtue of the very reliability that once made them seem staid. As investors stampeded into treasuries for protection-and drove down yields on even 30-year Treasuries-investors discovered they could suddenly earn higher returns on CDs.

Buy a CD now and you'll lock in a great rate with the confidence of knowing that your investment is FDIC insured.

How do CDs function and how can I take advantage of them?

CDs are low-risk investments you buy through a bank or thrift institution. For money you don't intend to use for a specified length of time-6, 9, or 12 months, or several years-the bank will guarantee you a fixed return, usually substantially more than what you can earn on your checking or savings account.

But CDs share an important attribute with checking and savings accounts: they are insured by the Federal Deposit Insurance Corporation (FDIC). All CDs you hold in one institution are insured by the FDIC up to $250,000 per person, per deposit category. That's a safety net you won't find with stocks, bonds or mutual funds.

Ease and accessibility are two of the many great features of CDs. Unlike stocks or mutual funds, you don't need a brokerage account to buy a CD. You don't even need to file any paperwork. Just call your bank or go online to buy CDs without incurring transaction costs.

While you can access your money in an emergency, there are penalties for taking out assets before the maturity dates on each CD, typically equal to returns earned over the prior one to three months.

What should I know before buying a CD?

Before buying any CD, make sure you familiarize yourself with rules that govern it.

Whenever or wherever you buy CDs, it is essential that you read the fine print to understand the terms. Just as banking and checking accounts come with different features from bank to bank, the terms of different CDs can vary substantially from one to the other.

Why are CDs important to banks?

CDs provide banks with a stable source of reserve funds. When banks sell you a CD, they can then turn around and lend the money in your account out to borrowers for more than they're paying you and other CD account holders. If your CD is earning you 4 percent, for example, the bank might lend it out to other borrowers for 6-7 percent.

While CDs make bank balance sheets look good, in this market, they make investors feel good, too. Financial planner Donald Hance of Pacific Palisades, CA. says his clients who are invested in CDs "are sleeping well at night."

Who should invest in CDs?

Fernandez and Hance agree that CDs are best for investors who need dependable returns on their money, but won't need the money for a specific period of time. Often these are investors who require predictability and safety in their investments.

Both financial planners say it's important to "ladder" your CD investments. That means you should buy CDs that mature every couple of months, for example, or every year to ensure your money is constantly being freed up at regular intervals should you need it.

Where can I get the best rates of return for CDs?

Rates vary from bank to bank. Often online banks, like Discover Bank, offer significantly higher rates of return for their CDs than traditional banks.

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