)
"CD’s offer
a sense of stability and a guaranteed rate of return, providing
investors a comfortable feeling in today’s turbulent market.
In many instances, your money is also protected under FDIC which lessens the fear of loosing your retirement funds."
Although current rates are attractive, for example the CD rates in Hartford, CT range from 1.8% - 3.10% on a 12-month and
between 1.80% -3.70% for a 24-month CD, there are
drawbacks. For instance, penalties may arise for removing your money early; inflation rates may grow higher than your rate
of
return, devaluing your investment; and as interest rates rise,
your CD is locked in at a lower rate thus loosing the opportunity
for growth.
To attract investment weary customers, financial institutions are
giving higher yields and more options. Some credit unions are
even offering a one time "bump-up" to a higher rate; which could
be used anytime during the CD term if interest rates rise higher
than the one purchased. Also, on longer term CDs (36 month)
rates are sold as variable and adjusted every six months. The
draw back on a variable rate CD is that it may go down as well
as up six months from now.
To protect your investments and to get a higher return, Timothy Liptrap suggests shopping around between banks, credit
unions
and local brokerage firms to compare interest rates,
yields and
the length of the terms. If you are purchasing a CD
through a
brokerage firm, ask which bank(s) they are
representing, make
sure it is FDIC insured and don’t be afraid
to ask for a higher rate.
In planning your purchase, an investment technique worth
considering is called "laddering". Laddering is essentially
dividing your money three pots and buying a CD that expires in
6
months, in 12 months and in 24 months. Thus, not tying up all
your money in one product and leaving yourself an option so you
can plan for
a large purchase or IRA distribution. This technique
is commonly used when purchasing bonds.
Timothy Liptrap is the editor of the 101 Financial Lessons
newsletter, which is used as a tool by parents and teachers to
help educated
children on financial concepts and money
management. This article is Copyright Ó
2005. Stocks, Bonds
and More, inc. For a free subscription to his newsletter
visit
