Bank cds and investments?

Question

How do bank cds work? Are they really worth the hassle because a friend of mine had one where he had to have a minimum balance of 5,000 and only got an additional 227 dollars for the year.

Answer 1

CDs are safe and generally get you a little bit better return than a standard savings account (because you're agreeing not to withdraw the money for a set period of time), but I would consider them useful only for holding money for your "emergency fund" or money that you expect to need within a couple years. After you pay taxes on the interest, you're barely keeping up with inflation, so I consider them a poor long term investment.

If you're investing money for long-term goals (college fund for a young child, retirement 10 or more years away, etc.), then I think CDs are a lousy choice. Since they're only going to grow at about the rate of inflation after taxes, that means YOU have to do all the work to save the money that you will need down the road.

I think a much wiser choice for long-term investments is the stock market. For most people, a mutual fund that tracks a major market index like the S&P 500 or Russell 2000 is probably a good choice. Historically, stocks have outperformed every other investment class over long periods of time. The average rate of growth is much higher than inflation, so the value of your investment is actually growing over time. That means your money is doing some of the work, which means less that you have to do.

Answer 2

Based on the current rates for CD's you should earn around the same as a "day to day account". There are many on-line, FDIC Insured banks that will open a CD for $500 & pay you a higher rate than a typical local bank;

www.GMACbank.com
www.INGdirect.com
www.HSBCdirect.com


BTW: I agree with the thought that if thses funds are for use, 10 years or more..... you need to look at no-load, stock mutual funds....... there is "risk" in the short term, but chances are over 10 years you'll do much better than CD's.

Answer 3

It depends upon the interest rate. Shop around, banks have different interest rates. They also have different length CDs which have different minimum balances. I think that they're worth it if you don't need the money for awhile.

Answer 4

its nothing you deposit them say for 5% and the lend back to someone else at 10%. Thats how they make profit. Advantage is that your money is safe and liquid, if you want to withdraw the money you can do so anytime paying the charges