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Questions to ask before buying a CD

By Sheyna Steiner ·
Friday, May 14, 2010
Posted: 11 am ET

CDs can be an attractive place to park some cash -- when interest rates aren't making a mockery of savers' attempts to beat inflation.

Be that as it may, CDs do offer convenience and an easy return on your money, plus your investment is backed up by the FDIC.

Before investing in a CD, buyers should ask themselves: When do I need this money? How long do I want to tie my money up at this interest rate? What is the early withdrawal penalty?

Consider the current interest rate environment and what may happen in the future. If a hike seems imminent, going further out on the yield curve may not make a lot of sense.

For instance, yields are not dramatically higher at five-year maturities than three-years in the current market.

According to the Interest Rate Roundup, buying a five-year CD today will bring in an average yield of 2.12 percent.

Bankrate research puts the average yield on a three-year CD at 1.5 percent.

If you choose to buy a longer-term CD, will the increased yield make up for the fee paid if you bail early to buy a higher-yielding CD? A recent Bankrate survey on early withdrawal penalties found that many institutions will draw from your principal if the interest accrued won't cover the fee.

What else do you want to know before you buy a CD?

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Sheyna Steiner
May 26, 2010 at 1:33 pm

This is a slightly self-serving suggestion but you could start with Bankrate's rate tables to get a sense for what's out there. Call your local banks and credit unions and check online banks to see what's available.

If you want to be a little more aggressive in your strategy you may want to explore investments beyond CDs. Index funds and ETFs can be a good (and inexpensive) way to ease into the market.

May 25, 2010 at 5:24 pm

This was a good for thought. I have a question - as a newbie investor, I should probably be more aggressive in my investing strategy but I'm a little lost since I hardly know anything about it. Any good tips besides the ones you offered for someone who would like to get a CD who has never bought one before? I wouldn't even know the first place to begin, in all honesty!