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Money Girl

209 MG Tips for First-Time CD Buyers

CDs offer a guaranteed return on your money that's completely safe. Get an overview of the different types of CDs, learn where to find high-yield CDs, and find out how to use "laddering" to maximize your CD income.

Broadcast on:
09 Feb 2011
Audio Format:
other

CDs offer a guaranteed return on your money that's completely
safe. Get an overview of the different types of CDs, learn where to find high-yield
CDs, and find out how to use "laddering" to maximize your CD income.

Hey Fidelity. How can I remember to invest every month? With the Fidelity app, you can choose a schedule and set up recurring investments in stocks and ETFs. Oh, that sounds easier than I thought. You got this. Yeah, I do. Now, where did I put my keys? You will find them, where you left them. Investing involves risk, including risk of loss, Fidelity brokerage services LLC member NYSE SIPC. After investing billions to light up our network, T-Mobile is America's largest 5G network. Plus, right now, you can switch, keep your phone, and we'll pay it off up to $800. See how you can save on every plan versus Verizon AT&T at tmobile.com/keepandswitch. Up to four lines via virtual prepaid card, a left 15 days qualifying unlocked device credit service ported 90 plus days with device and eligible carrier and timely redemption required. Card has no cash access and expires in six months. Hi, everyone, and welcome to the Money Girl Podcast. I'm Laura Adams, the author of the new book Money Girl Smart Moves to Grow Rich. In last week's show, I gave you tips about how to invest money in the financial markets without taking too much risk. This week, I'll tell you about CDs or certificates of deposit and how you can use them to keep your money completely safe. You'll get an overview of the different types of CDs and learn the best places to find high-yield CDs. I'll also reveal a special technique called laddering that's a smart way to maximize income from CDs. So, what exactly is a certificate of deposit? Well, a CD is a financial product that's offered by banks and credit unions. The minimum amount that's required to open a CD is generally $500. As long as you buy one from a bank with FDIC insurance or from a credit union with NCUA, that's National Credit Union Administration Insurance, it's federally insured up to a certain amount, just like other types of bank accounts. A CD is different from a savings or a money market account because you give up access to your money for a period of time, which is called the term. In exchange for agreeing not to touch your money during a CD's term, you typically get more interest than with other types of deposit accounts. A CD gives you a guaranteed return, albeit a low one right now, no matter what happens to the economy or the financial markets. Typical CD terms range from three months to five years with the longer terms generally yielding the highest interest rates. Though it can be really tempting to buy a CD with the longest term, you have to be certain that you won't need to withdraw the money before the maturity date because that can result in a high penalty. When the term is over, you get back your principal, that's your original deposit, plus the accumulated interest. What I've just described, a product with a fixed term and interest rate, is called a traditional CD. That's the most common type, but there are other kinds. Here are eight different types of CDs to be aware of. Number one, variable CDs, pay an interest rate that's based on an index, such as the treasury bill rate or the prime rate. Number two, zero coupon CDs, pay interest only at the end of the term and don't allow the option to withdraw interest. Number three, add on CDs, allow you to make additional deposits to a fixed or variable rate CD. Number four, callable CDs, give the bank the right to call or buy back a CD after an initial period and before the end of the term. Number five, liquid or no penalty CDs, allow you to withdraw a portion of your money without paying a penalty. Number six, bump up CDs, give you a fixed interest rate with the option to increase the rate one time during the term of the CD to take advantage of rising interest rates. Number seven, step up or step down CDs, give you a fixed interest rate for a set period of time and then automatically increase or decrease to a predetermined rate. And eight, jumbo CDs require a deposit of at least $100,000 and typically offer a higher rate of interest. Speaking of interest, there are two main ways that interest is expressed for CDs, APY and APR. APY stands for annual percentage yield and it's the rate you'd receive if all the interest you earn gets added back to your balance or is compounded. In other words, APY is the rate you'll get if you never withdraw interest from a CD. APR on the other hand stands for annual percentage rate. It's the rate of interest you earn without taking into account the effects of compounding in that year. It's the rate you'd receive if you withdrew every penny of interest and didn't allow it to compound. When you see a CD rate that doesn't specifically say it's the APY, you should assume it's the APR. As I mentioned, the longer you're willing to commit money to a CD, the more interest you'll typically earn. For example, right now, Ally Bank is offering a five-year CD that pays 2.39% APY and a one-year CD that pays 1.29% APY. So if you put $10,000 in the one-year CD and didn't withdraw any interest, you'd make $129 at the end of the term. To calculate your return on CDs with terms longer than one year, it's really helpful to use a CD calculator. Let's say you want to know how much you'd earn if you put 10,000 in Ally's five-year CD. If you use the CD calculator at dinkytown.com, it asks for your initial deposit, the CD term in months, the interest rate, which is the APR, not the APY, and the compounding frequency. Ally's site tells you that the APR is 2.36% and that the interest is compounded daily. Entering this information shows that you'd have $11,252 at the end of the five-year term. That means you'd make $1252, assuming that you didn't withdraw any interest. Online banks have some of the highest CD rates, so check out sites that compare national offers, like bankrate.com, bankaholic.com, and moneyrates.com. Also, be sure to check rates at your local community banks and credit unions, because they can offer pretty competitive CDs when they're trying to attract more deposits. Nearly a billion people experienced hunger last year, and organizations on the front line need support. That's why at Global Citizen Festival, City announced a new commitment supporting World Food Programs' mission, and you can help. City will match donations to World Food Program up to $250,000 until December 1st or until we reach our goal, whichever comes first. Visit wfpusa.org/city to make a donation and double your impact. For the love of making a difference, for the love of progress, City. He's better over here! AT&T customers, switching to T-Mobile has never been easier. We'll pay off your existing phone and give you a new one free, all on America's largest 5G network. Visit T-Mobile.com/carrierfreedom to switch today. Pay off up to $650 via virtual prepaid master card in 15 days, free phone up to $830 via 24 monthly bill credits plus tax qualifying, porting, trade and service on Go 5G next to credit required. Contact us before canceling entire account to continue bill credits to credit, stop and balance and require finance agreements too. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science and social studies. Ixcel has interactive practice problems for topics from pre-k to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixcel.com/moneygirl. Visit ixcel.com/moneygirl to get the most effective learning program out there at the best price. Before you buy a CD, consider using a common strategy called "ladoring" to help maximize your potential earnings. "ladoring" simply means that you own CDs with different maturity dates and annual yields. Each run on a CD ladder represents a different CD that has a progressively longer term. Here's an example of why it's a good idea to ladder CDs. Imagine that you put $100,000 in a traditional 5-year CD that pays 2.5%. Now, think how bummed you'd be if the interest rate for a 5-year CD went up to 3.5% the following year. You'd miss out on earning more interest because you locked up your money at 2.5% for 5 years and can't withdraw it without paying a penalty. With a laddering, you might choose to buy 5 CDs with your $100,000 instead of just one. For instance, you could put $20,000 in a 1-year CD, 20,000 in a 2-year CD, 20,000 in a 3-year CD, and so on, up to a 5-year CD. After one year, when the first CD reaches maturity, you can use all or a portion of the money to purchase another 5-year CD. So, as your shortest CD matures, you use it to buy a longer-term CD. That presumably has a higher interest rate. This laddering technique protects you against missing out on higher returns if interest rates rise. Laddering allows you to earn more money and gives you greater flexibility because as each CD matures, you have the option to renew it at the current rate or to use your money for something completely different. Use a CD ladder calculator to see how you could benefit from using this strategy. Now that you know more about CDs, you might be wondering if you should buy one. A short-term CD might be a good option for funds that you plan to spend after the maturity date, of course, on something like a house down payment or a vacation, even if it's just a small amount of money. But be sure to research interest rates on high-yield savings and money market accounts because they may pay a return that's very similar to or more than a short-term CD without requiring you to sacrifice liquidity or quick access to your money. The most common reason to buy a CD is when you have a relatively large amount of cash that you want to keep completely safe while earning a little more interest than you could with a savings or money market account. This might be the case if you're a retired or approaching retirement or are simply too risk-averse to invest any amount of money in the financial markets. Balancing risk and reward is the ongoing struggle that all savers an investor's face, especially right now with interest rates at record lows. CD's don't offer much return on your money, but they're a sure thing with virtually zero risk. If you like the tips you get from the Money Girl podcast, I think you'll like my book. It tells you what you really need to know about money without bogging you down with what you don't. The paperback is available at Amazon.com or your favorite bookstore and as an e-book for your Kindle, Nook, iPad, PC, Mac or smartphone. And here's something else to check out if you want to age gracefully. Nutrition Diva, Monica Rinegles, free new e-book, five secrets for aging well. Learn to limit your sugar intake and find out why you should be getting a full seven to eight hours of uninterrupted sleep per night. Start now and you'll look young forever. Five secrets for aging well is available for download on Amazon, Barnes & Noble, and iTunes. I'm glad you're listening. Cha-ching! That's all for now. Courtesy of Money Girl, your guide to our richer life. What's up podcast listeners? It's Tynx, host of the It's Me Tynx podcast. Join me weekly on It's Me Tynx as I dive into topics like relationships, why it's okay to feel lonely, fighting summer comparison, and pop culture's hottest takes. I don't shy away from getting candid about my personal experiences and I want to share all the advice I have learned with you. I'm even joined by some of my friends like Claudia Oshrei, Connor Wood, and Amanda Hirsch each Friday for our new office hours episodes. You can listen to It's Me Tynx every Monday, Wednesday, and Friday wherever you listen to podcasts. And don't forget to follow the show so you don't miss an episode. Earning your degree online doesn't mean you have to go about it alone. At Capelli University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals to academic coaches who can help you form a plan to stay on track. We care about your success and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. Imagine your future differently at cappella.edu. [BLANK_AUDIO]