A certificate of deposit (CD) is a longer term investment that will give you a much higher yield than having the money in your savings account. A CD is a non-liquid account unlike money market or savings accounts, but the interest you earn will be significantly higher than those types of accounts. A CD is often issued by banks but some people prefer to purchase them from a brokerage. You invest a fixed amount of money for a set amount of time (6 months, 1 year, 5 years) which is called the "term" and you are guaranteed your principal plus a fixed amount of interest. If you cash out your CD early, you will be penalized and definitely lose the interest as well as perhaps some of the principal. When the CD term matures, you have the option of either cashing out the principal and interest or "rolling over" the CD for another term. The longer the term that you go with, the higher the interest rate you will get. CDs are insured by the FDIC up to $100,000 ($250,000 on retirement accounts). You often hear financial advisors say you need an emergency fund set aside that has 3-6 months of living expenses in it. Putting this money into a certificate of deposit is a smart idea to earn the highest available CD interest rate.
The more money you have to put into a Certificate of Deposit and the longer you can afford to let it sit (nothing more than 5 years is recommended) means you should get the best bank CD rate on the market. The different types of CDs are the traditional, bump-up, liquid, zero-coupon, callable, brokerage, and high-yield. A traditional type is when you put a fixed amount of money in for a set term and get a predetermined interest rate. When it matures you either roll it over or cash it out. You can also add funds during the term (usually) or if you decide to roll it over. A Bump-Up CD gives you the option of getting a higher interest rate during the term if interest rates rise and your bank adjusts the CD rate to an even higher level. You can then have your bank bump up your CD to the current rate, although you will often get a lower initial rate to start with. A liquid CD is where you can actually withdraw funds from the Certificate of Deposit without incurring a penalty. Interest rates on these type of CDs tend to be lower than traditional ones but higher than money market rates. Be sure to check with your bank on the minimum balance required on a Liquid CD account and how many withdrawals you are allowed over the term. A zero coupon CD is similar to a zero coupon bond where you buy the Certificate of Deposit at a discount compared to the amount it will be worth when it comes due. The only issue with zero coupon CDs is that you will have to pay taxes on "phantom income" accrued each year on the CD. A callable CD is one where you get a CD interest rate that tends to be higher than the regular rate on say a 5 year CD, but the bank can "call" or take back the CD and reissue it at a lower interest rate if CD rates go down during the term. Often the "call period" is 6 months or so, which means that after 6 months into the term of the CD, the bank can decide if they want to take back your CD. It's not a bad situation for an investor since they pay you a higher rate to start with. A brokerage CD is one that is sold through a brokerage and they often come with higher interest rates than Bank CDs and they tend to be more liquid than bank CDs.
Highest CD Rate:
To find the current CD rate or the highest rates we went to Bankrate.com and Money Magazine to do our research. Even the Wall Street Journal publishes the latest and best CD rates from banks. You can quickly compare rates or use the rate calculators on these sites to find the best CD rate for your situation. The top CD rates fluctuate from week to week and month to month as market conditions change, so be sure to check back to these sites often for the highest yielding CD. See below for our quick comparison on the best 6 month CD rate, 1 year rate, and 5 years rate. Another popular option is the 1 Year Jumbo CD that we don't have listed below, but you can find information on most of the sites listed. For your convenience, you will find bank names and phone #'s where we could find them. We start with the best 6 Month CD rate (from Bankrate.com):
AmTrust Direct (888-228-8146) - 5.61% Yield - Minimum Deposit is $1000 - Visit their website HERE
E-Loan (866-576-7283) - 5.61% Yield - Minimum Deposit is $10,000 - Visit their website HERE
Tennessee Commerce Bank - 5.40% Yield - Minimum Deposit is $5,000 - Visit their website HERE
Countrywide Bank (800-841-9986) - 5.35% Yield - Minimum Deposit is $10,000 - Visit their website HERE
GMAC Bank (866-246-2265) - 5.35% Yield - Minimum Deposit is $500 - Visit their website HERE
EverBank (888-882-3837) - 5.25% Yield - Minimum Deposit is $1500 - Visit their website HERE
The Best 1 Year CD Rates (from Money Magazine - Nov/2006):
Ascencia Bank (877-369-2265) - 5.58% Yield - Minimum Deposit is $500 - Visit their website HERE
Millennium Bank (866-474-2265) - 5.65% Yield - Minimum Deposit is $10,000 - Visit their website HERE
Corus Bank (800-555-5710) - 5.63% Yield - Minimum Deposit is $10,000 - Visit their website HERE
Pacific Mercantile Bank (866-450-5600) - 5.48% Yield - Minimum Deposit is $10,000 - Visit their website HERE
Countrywide Bank (800-841-9986) - 5.40% Yield - Minimum Deposit is $10,000 - Visit their website HERE
5 Year CD Rates (information from bank websites as of 10/26/2006):
World Savings (866-467-3776) - 5.14% Yield - Minimum Deposit is $10,000 - Visit their website HERE
Bank of America (800-432-1000) - 4.11% Yield - Minimum Deposit is $10,000 - Visit their website HERE
Citibank - 4.71% Yield - Minimum Deposit is $500 - Visit their website HERE
Washington Mutual (800-788-7000) - 4.35% Yield - Minimum Deposit is $1000 - Visit their website HERE
NetBank (888-256-6932) - 5.23% Yield - Minimum Deposit is $1000 - Visit their website HERE
6 Month vs 1 Year vs 5 Year CD Rates:
As we discussed above, CDs are a great place to put extra money you would normally keep in a low interest bearing savings or money market account that you don't need immediate access to. CD rates are higher than savings accounts or money market accounts but are less liquid in nature. 6 month CDs are great for those emergency funds while 1 year or 5 year CDs are better for college savings that you don't need to touch for a long time. In unstable market conditions where stocks may not always perform that well, having savings in a CD is a smart move.
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