How should I invest in CDs?

Question

I was told that if I buy $1000 worth of a CD that has a 5% return in 3 months, I will end up with $1050 in 3 months for sure, no matter what, with no risks whatsoever. Is that how it works???

Answer 1

5% is actually an annual return. So for 3 months you would actually receive about $12.50 before taxes and inflation. Assuming you are in the 15% federal tax bracket and 2% state tax bracket and inflation is running about 5% annually, a conservative estimate, your net return will be about -$2.13. In other words you are going to be in the hole $2.13 by investing in a 5% cd. That however might actually be the best of several investment options as it certainly looks like the U S economy is going into melt down mode.

Answer 2

There are CDs that accrue interest monthly, but you'd have to shop around. You could get a better rate with an index fund or you may want to start contributing to an IRA. You would have to get at least a 3-5 year CD to make any real money.

Answer 3

Not true you would get $50 a year interest not in 3 months. CDs aren't investments they are savings. You are lending your money to the bank to lend out to others. Investing is buying part of a company or other asset to make money grow and is risky. Savings money barely bets inflation and over the long term doesn't get you as much return as investing but is safe if FDIC insured.

Answer 4

No. You may want to put that $1000 in mutual funds and try to get 10-15% interest instead of 5%. This will also give you liquidity as opposed to locking your capital up in a cd.

Answer 5

CD returns are annual percentages, not quarterly.

Answer 6

That is true . It is safe investment.