Tips for Purchasing Bank CDs

After the Federal Reserve set the target fed funds rates a hair above zero, savings rates have dropped rather significantly.  Today’s low rates make the thought of keeping your money under the mattress a reasonable alternative.  Before an investor resorts to a decision that dire, consider that there are still desirable interest rates on bank CDs worth looking for and investing in.  Federally insured savings with above average interest rates is a one-two combination that should not be ignored.

Since the U.S. economy went into a recession, returns on equities, commodities and Treasuries have slipped into a dark hole of negative returns or complete uncertainty.  In period such as this an investor can’t afford not to invest their savings in a federally insured interest bearing account such as a CD.

Investing always requires some effort; the action of handing over money for the purpose of achieving a secure and rewarding return should take some effort.  Fortunately investing in bank CDs is safe, secure and can be accomplished quite easily while achieving a superior rate of return.  The purpose of this, www.selectCDrates.com is to make the process of searching and comparing the best CD rates as easy as possible.

The assumption with bank CDs is that since they are very low risk investments and have lower potential returns.  Therefore investing in a CD is a task of merely walking to the neighborhood bank and making a deposit.  However, there are tips for investing with banks that, after putting a little effort in the task, can yield a measurably higher rate of return accompanied with the inherent safety and security that comes with these investment selections. 

The difference between bank products can be critical regarding how the rates of return are determined.  The highest interest rates found in bank products generally include money market accounts, certificates of deposit and online savings accounts.  Money market accounts and savings accounts can pay very desirable rates of return at some banks however, these rates are variable rates.  This means that the advertised rate of return or historical rate of return is no guarantee that the interest rate earned will continue.  When interest rates drift lower, as they have during this “Credession”, the interest rates received on money market accounts and savings accounts will trend lower as well.

CDs will often earn the highest interest rates and these interest rates are, for the vast majority of bank CD products, fixed for the term of the CD.  But, bank CDs do require a commitment of time.  Money withdrawn from a CD will incur a penalty for early withdrawal.  With a bank CD, the investor agrees to leave the money invested for a specific time period in order to receive the higher yield.  The increased return is the reward for this time commitment.  If the investor needs the funds early and need to withdraw the money before the time commitment is up, the CD accountholder will be assessed a small penalty.

The first step to bank CD investing should be a thorough understanding of the investors time horizon and investment goals.  Knowing the time horizon will enable the CD investor to know the term or length of the CD they should be evaluating.  Longer term bank CDs will almost always yield a higher rate of return but for the investor who needs access to those funds in the immediate future, the reach for the higher interest rate will not match their time horizon and that early withdrawal penalty will leave a dent in the investment. 

Avoiding early withdrawal penalties is essential.  Reviewing your goals and time horizon along with a review of the bank CD terms before making the CD purchase we help assure that the early withdrawal penalties will not have to be incurred.  If funds are withdrawn before maturity, a bank CD accountholder will generally pay a penalty regardless of the reason.

When investigating the terms of a particular bank CD, be aware of the conditions for automatic rollovers.  Many banks now have an automatic rollover policy with their CDs.  When a CD reaches its maturity date, the principal is either returned to the investor or rolled over into another CD.  Automatic rollovers means if the CD accountholder does not request any changes or action, the CD will automatically rollover into a new CD.  Generally the new CD has the same term but will be at the current market interest rates offered by the bank for that term and the new rate may not be as competitive.  The end result is the CD will now lock the accountholder into an interest rate that they may not want.  If you keep track of maturity dates, you can make sure that you get the best CD rates available.

The automatic rollover provision in bank CDs is especially important with special promotion CD rates.  When comparing the best CD rates, an investor may notice that the best rates are frequently within the state they live in and are the special promotions of one local bank or another.  Often the special promotional rate CDs are odd month CD rate offers.  Odd month CDs are CD terms that do not follow conventional terms.  Example of standard CD terms are 6 month CDs, one year CDs, 18 month CDs , two year CDs and so on.  Odd month bank CDs may be a 4 month CD term, 7 month CD term, 13 month CD term, 25 month CD term and more.  The caution is that the odd month promotional CD will eventually mature and when it does it will frequently, automatically rollover into a bank CD with the nearest standard term.  This CD is not likely to be earning an interest rate that is comparable to the promotional rate the CD was just yielding.  In these cases, be mindful of the rollover terms, redeem the CD at maturity and search again for the best CD rates that are now available.

Always search and select the best CD rates.  Once you’ve selected the duration and type of CD you want, find out what rates are available at different banks.  The best CD rates can have different meaning for different investors.  Some bank CD accountholders will not do business with a bank that is not in their immediate geographic area.  Some bank CD investors will avoid online banks.  Online banks pay competitive interest rates because they have lower overhead than their brick-and-mortar counterparts.  Some banks out of a geographic region may be offering the highest CD rates for that point in time.  The main drawback in either case, is that you can’t walk into a branch to take out your money.  Most online banks, however, provide ATM access, and allow you to wire-transfer money to other accounts.  Contrary to what conventional bank rate coverage exists, the best CD rates are often right in your back yard.  Don’t shop just the best national CD rates; these banks are classified as the best CD rates offered simply because they fall into the group of banks that offer these rates nationally.  Almost every week, the best national CD rate is eclipsed by the best CD rates offers by state banks and community banks. 

Let your interest compound in the CD account.  If you don’t need the interest income for expenses, continue to reinvest to obtain the higher rate of return.  Put simply, the compound interest is how your investment grows over time with reinvested earned interest.  As an example, let’s say a bank customer invests $10,000 in a three year CD earning 5% annually.   In the first year, your $10,000 investment will earn $500.  In the second year, 5% of the new total, now $10,500, will be $525.  In the third year, 5% of $11,025 will be about $551.  The total amount of money grows each year, so the amount representing 5% of your investment also grows.  This is the value of compounding interest.  If the interest earned is paid out instead of being allowed to compound within the CD account, the interest earned on interest earned will be lost or reduced if it is deposited into another account that earns a lower interest rate.

There are a variety of different CDs offered today, particularly since the popularity of bank CDs has increased of late.   Some of these bank CDs include variable interest rates, step up CD rates, bump up CD rates, indexed CD rates, CDs with added liquidity provisions and callable CDs.  Know these variables and terms before committing your cash to such bank products.  Sometimes these added features have merit but often these features come with a cost, the most common cost is a reduced initial interest rate.  Granted, some of these CD features will have value in different interest rate environments and for particular investors.  For most bank CD investors, the objective is to search for a level and more reliable investment instrument with a high yield, CDs with features that reduce the yield for the potential of a fairly minimal upside returns does not fit this profile.

Bank CDs can spare investors the wild ups and downs of the stock market.  With CDs, the investor can minimize these ups and downs with a guaranteed fixed rate of return and guaranteed principal.  As long as you select bank investments products, like CDs, that are FDIC-insured and stay within the insurance limits, the bank savings product will offer consistent gains and most importantly no losses.  Use safe investment vehicles, such as CDs, to protect yourself from market risk.  Even if you have to start with small deposit amount, sticking to a safe and solid return investment program is always a good idea.  A good bank CD should be considered as a part of any well-diversified portfolio.

Tags: 18 month CDs, 6 month CDs, bank, bank CD rates, bank CDs, best CD rates, CD rates, interest rates, money market, one year CDs, online savings accounts, two year CDs

This entry was posted on Wednesday, March 11th, 2009 at 7:47 pm and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.