Can someone explain what a CD is? I am interested in opening one, but dont understand

[divinemadness]

Hello,

Ok, I am always looking for different ways and avenues to save money and just let the interest compound and build for the future.

I recently stumbled upon a CD article and im very very very very interested in opening one.

I checked USAA where i am a member and hold my Roth IRA and savings account, and they offer fixed term 6 mths at 3.3% ... ect..

I am wondering what are fees, taxes, ect, on CDS?

I am not going to touch it. I have 1,000.00 to open one and USAA is 1,000 to open. I am going to look around for better rates, but I feel safe with USAA. I still need to check PFCU where I am a member as well for there rates.

Anyway, I will not touch it, i just want the interest compound, but i am having a hard time understanding how this works, my goal is to grow my money and quickly.

Correct me if im wrong:

for example:

I open a CD with USAA for $1,000, 6 mths term 3.3%

in 6 mths the CD matures, and I now have interest added to my original $1,000 - right? So 3.3% of 1,000 = $330 --- so now i would have $1330 right?

and i would keep renewing the cd. and letting the interest compound.

now is that right? do i have the concept down or no?

are there risks with a cd? or is the interest determined by the market, but really just like a high yield savings account? is all the interest earned mine to keep?

this is what ive got so far from reading on USAA and other sites. If anyone could help me or explain better if I'm missing anything that would be wonderful. Thanks!!!

Oh and also --- are there any cds that tie to a credit bureau or line of credit or anything that will show positive on my reports ect.. thanks!!

[Denita]

If the interest is 3.3% on a 6 month CD...that means the APR is 3.3% so the interest you would earn in 6 months is 1/2 of $330 (for a $1000 CD)

[matthewscott]

...

I wish I had money to invest in a CD! I think you should go for it.

A CD is a certificate of deposit. The deposit is guaranteed by FDIC insurance. It is not a fast way to make money. However, it is 100% guaranteed and safe. If you need the money in a few years then a high rate CD might be right for you. You should check out the CD ladders.

The interest rates are set by the bank. I assume they are based on another key interest rate. The banks are competitive on this. Pretty much any bank you go to will have these investments available.

All of the interest is yours to keep as long as you don't break the CD. If you need the money out then you can get to it but you will be penalized. You will pay taxes on the earnings. I don't think you should worry about it. I doubt it will affect you very much.

I'm not aware of anything from a CD that would affect your credit rating.

For more information you might check out wikipedia.

http://en.wikipedia.org/wiki/Certificate_of_deposit

I hope this helps. If you have any more questions please ask. These are very simple investments and they are very safe. I think you should consider these. Especially if you think you will need the money in a few months or years. Good luck!

If the interest is 3.3% on a 6 month CD...that means the APR is 3.3% so the interest you would earn in 6 months is 1/2 of $330 (for a $1000 CD)

I agree. APR = Annual Percentage Rate.

[divinemadness]

what is the difference between a CD and a money market certificate?

PFCU i cant find CD's anywhere on there site..

[swirlgirl]

Basically the same thing. Certificates = credit union lingo.

[jq26]

No risk to money if below FDIC limits.

Penalty paid if you pull money out prior to the term of the CD.

Not a good way at all to grow money- it is a way to preserve your money for ST needs (less than 5 years). ex: you want to buy a home in the next 5 years, but definitely not this year. Locking your money in a one year CD might not be a bad idea.

CD income is taxable as ordinary income. Its taxed at your marginal rate. It does not enjoy preferential cap gain rates nor does it allow you to grow your earnings tax-deferred.

Over a long term (>10 years), you'll actually lose money in a CD. The after tax gain you'll receive will be outpaced by inflation. Warren Buffett just wrote a great open letter regarding the fallacy of seeking "safety" in money markets and CDs.

[ManWithANewPlan]

I open a CD with USAA for $1,000, 6 mths term 3.3%

in 6 mths the CD matures, and I now have interest added to my original $1,000 - right? So 3.3% of 1,000 = $330 --- so now i would have $1330 right?

3.3% of $1000 is not $330. It's $33. $330 is 33% of $1000. If you find in investment that returns %33 that's as safe as a CD, by all means, let me in on it.

Depending on how they apply the interest, after six months with $1000 in a 3.3% APR, you will wind up with a little over $1016.5 total.

CDs are not a method for growing money quickly. There is no *safe* investment that will grow your money quickly.

Try this link to evaluate your return on a CD:

http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp

Current rate of inflation is 4.94% (http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp) so at 3.3% over 6 months you're actually losing buying power. That said, CDs are about as safe as it gets investment wise.

[jq26]

My bank is STILL giving me 4.01%apr on my checking account. I locked in this rate about 18 months ago and figured it was for the short term. When I asked how long this will last they said I am now grandfathered in.

This is more than most CDs, and better than both my ING and HSBC "high-yield" accounts.

Got to love the little corner banks. They actually like you (& your money). Free checking with free checks and high yields. Not mention they know your name when you walk in.

[matthewscott]

3.3% of $1000 is not $330. It's $33. $330 is 33% of $1000. If you find in investment that returns %33 that's as safe as a CD, by all means, let me in on it.

Depending on how they apply the interest, after six months with $1000 in a 3.3% APR, you will wind up with a little over $1016.5 total.

CDs are not a method for growing money quickly. There is no *safe* investment that will grow your money quickly.

Try this link to evaluate your return on a CD:

http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp

Current rate of inflation is 4.94% (http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp) so at 3.3% over 6 months you're actually losing buying power. That said, CDs are about as safe as it gets investment wise.

Thanks for correcting the mathematical mistake. I looked right over it. I suck at math.

[divinemadness]

Thanks for correcting the mathematical mistake. I looked right over it. I suck at math.

ah. ok. apparently me too. hahaha

so if a cd wont grow my money, then what will? whats the purpose of a cd then?

[DHK]

ah. ok. apparently me too. hahaha

so if a cd wont grow my money, then what will? whats the purpose of a cd then?

The purpose of a CD is for you to have a safe place to preserve your capital.

For the bank, it provides a more stable base of deposit dollars from which to lend.

There are many other ways to grow your money. With the market the way it is right now, if this is LONG term money, I'd consider investing it.

If it's short-term money (needing to use it within 1-3 years), then a CD would still work fine without subjecting this money to possible capital losses.

[divinemadness]

The purpose of a CD is for you to have a safe place to preserve your capital.

For the bank, it provides a more stable base of deposit dollars from which to lend.

There are many other ways to grow your money. With the market the way it is right now, if this is LONG term money, I'd consider investing it.

If it's short-term money (needing to use it within 1-3 years), then a CD would still work fine without subjecting this money to possible capital losses.

long term... what kind of investments? im 23 and want something i can put away for when im like 40

[matthewscott]

long term... what kind of investments? im 23 and want something i can put away for when im like 40

Have you started a retirement fund? If your employer offers a 401k or something similar then you should contribute to get the match. A ROTH IRA would be another option.

I didn't realize that you were saving for retirement. I don't think a CD is what you're looking for. If you need the money sooner then a CD would serve that purpose.

[divinemadness]

Have you started a retirement fund? If your employer offers a 401k or something similar then you should contribute to get the match. A ROTH IRA would be another option.

I didn't realize that you were saving for retirement. I don't think a CD is what you're looking for. If you need the money sooner then a CD would serve that purpose.

i have a 401k 60% stocks, 40% bonds, and i have a roth ira through usaa

i thought maybe there was something else i could invest this spare money in to get the biggest return... should i have a regular savings account as well?

[ManWithANewPlan]

For long term investments, the stock market is the best place to invest. The S&P delivered 13.4% over the period of 1978 to 2004 (http://money.cnn.com/galleries/2007/real_estate/0704/gallery.stocks_v_realestate.moneymag/index.html).

Now, you may have heard about the little financial crisis we are going through right now, and that is cause for concern, but the stock market has always bounced back over the long run. In 1987 we experienced a similar drop in market prices. Within 18 months of the 87 crash, the market had returned to its previous levels. That's why you don't invest in the market short term. If you have time, the market has always recovered from any losses.

Of course, any financial advisor will tell you past performance is no indication of future performance.

The best way to invest in the market is generally through mutual funds. Do some homework and learn about how they work.

You mentioned you want to use this money when you are 40 or so; if so, then don't put it into your 401k or IRAs. 401ks and IRAs are intended for retirement savings and have significant penalties for withdrawing before 59.5 years of age regardless of whether that's when you actually retire.

There are, of course, other investments that beat the market. Other things you could consider are investing in your own business, your own education, etc, which could return better in higher salaries over the years for example.

I also agree with jq26 below, if you don't have 3-6 months expenses in a savings account, put it there first.

[jq26]

Yes you should have a savings. And not in the form of a CD. 3 months living expenses would be ideal, but I'd say the vast majority of people don't have that. Nevertheless, if you don't have a savings account, you'd be well suited to place this in an ING account, earn 3%, and have it there in case you need to draw on it in an emergency or unbudgeted expense (medical, dental, vehicle, rent, etc.). It won't really grow, but it will serve a better purpose. Let your 401k do the growing...for now.

Then once you have sufficient savings, then there are plenty of other options of investment outside of 401ks. Doesn't sound you're there quite yet.