Investing in CDs

Prior to investing in CDs, go through this checklist and verify you are doing the best thing.

CD Defined

A CD is a special deposit account typically with a bank or credit union that offers a higher interest rate than a regular savings account. You agree to have your money locked up for a specified time period at a fixed interest rate.

"When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. If you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned."

CD Investing Checklist

If you are thinking of investing in a CD, don't always just choose the CD with the highest interest. Here is a checklist I developed using information published by the Securities and Exchange Commission (SEC).

• When investing in CDs, consider your overall financial plan, what risk you are willing to take, how diversified you are, how accessible you want your money to be and other factors.
• Find Out When the CD Matures – As simple as this sounds, many individuals fail to confirm the maturity dates for their CDs and are later shocked to learn that they’ve tied up their money for five, ten, or even twenty years. Before you purchase a CD, ask to see the maturity date in writing. If you are considering a CD with a maturity date later than December 31, 2009, think carefully about the amount of your CD purchase. On January 1, 2010, the federal deposit insurance limit is $100,000 for most deposit categories.
• Investigate Any Call Features – Your ability to lock in a good interest rate for a long time is restricted with a callable CD. Callable CDs give the issuing bank the right to terminate – or "call" – the CD after a set period of time, but they do not give you that same right. If interest rates fall, the issuing bank might call the CD. In that case, you should receive the full amount of your original deposit plus any unpaid accrued interest. But you'll have to shop for a new one with a lower rate of return.



• Potential Pitfall – Do you understand the difference between a CD’s call period and maturity date? Don’t assume that a "federally insured one-year non-callable" CD matures in one year. It doesn't. These words mean the bank cannot redeem the CD during the first year, but they have nothing to do with the CD's maturity date. A "one-year non-callable" CD may still have a maturity date 15 or 20 years in the future.
• Confirm the Interest Rate You’ll Receive and How You’ll Be Paid – You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable. Be sure to ask how often the bank pays interest (for example, monthly or semi-annually) and confirm how you’ll be paid (for example, by check or by an electronic transfer of funds).
• Ask Whether the Interest Rate Ever Changes – If you’re considering investing in a variable-rate CD, make sure you understand when and how the rate can change. Some variable-rate CDs feature a "multi-step" or "bonus rate" structure in which interest rates increase or decrease over time according to a pre-set schedule. Other variable-rate CDs pay interest rates that track the performance of a specified market index, such as the S&P 500 or the Dow Jones Industrial Average.
• Research Any Penalties for Early Withdrawal – Be sure to find out how much you’ll have to pay if you cash in your CD before maturity."

When investing in CDs remember to choose the path that makes the most sense for your particular situation.

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