Once again I would like to point out that I am not endorsing one institution’s Certificates of Deposit over another institution’s.  My employer is not paying me to write this post.

I really like Certificates of Deposit (hereafter known as CDs).  They are a secured investment that will provide interest at a rate that is typically better than a money market account.  They can also be tied with an IRA or the (in my opinion much better) Roth IRA.

So how do Certificates work?

Basically, CDs pay better interest because the customer can’t withdraw the funds without a penalty.  The bank pays more interest because while the customer can’t withdraw the funds, the bank can invest that money to create earnings for themselves that are greater than what they pay out to the customer at the end of the CD term.  That’s why longer term CDs typically pay better than short-term ones.

What should a person look for in a CD?

• Rate- What would the rate be if your money was in a money market?  The higher the Annual Percentage Yield, the better.  Always ask for the APY some institutions have a rate that they pay on a different scale than annually which results in a different APY than the actual rate.
• Specials- Everyone likes a good deal, and specials are what financial institutions have instead of sales.  Look for a short-term (less than 9 months) and a long-term (greater than 1 year) special.  If the institution isn’t offering both, then they have other priorities.
• Company Practice- Does this bank do community reinvestment because it’s required by law, or do they do it because they want to be a part of the community?  Do they invest in companies that you don’t like, such as tobacco or oil companies?  Remember, when you open a CD with someone, you’re saying to them, “Go spend my money how you please.”

Why would someone want a CD?

• Save for retirement- It’s an FDIC or NCUA insured investment, which means you won’t lose money until you are over the $100,000 mark at least, the FDIC insures retirement funds up to $150,000.  Look into setting it up as some kind of an IRA if it’s for retirement, talk with a tax professional about all your options.
• Put away some emergency funds- Anything above a month’s expenses should be ok to put in a CD, this will keep your funds growing slightly faster than inflation, and provide a good way to keep you from spending the money when you don’t need it.
• Live life like a rockstar-  If you have a spare million dollars sitting around, you could be earning $51,000 a year with the right CD special.