Certificates of Deposit might be the safest investment vehicles out there and in the volatile market of early 2009, this old favorite might be the best investment for today. What is it? A CD is basically your assurance that a bank will be able to use your money for a specified period of time. Just as you pay the bank back on their money with interest (a mortgage or car loan for example) they do the same for you with a CD.
What are the advantages of a CD? First, they are safe. If you have money and you know you are going to need it and can't afford to have any risk attached to it, get a CD. Next, they are easy to set up. It's as easy as shopping around for the best deal at an institution you trust and signing up. If you can open a savings account, you can open a CD. You also don't have to be a financial genius to make money on a CD. There aren't many different types (other than the length and amount of money invested.)
What are the disadvantages of a Certificate of Deposit? Remember that the safer the investment, the less money it will pay you. You don't get a lot safer than a CD so don't look to get rich unless you are rich already. At the time of this article, CDs are paying between 2% and 4% on average. Contrast that with a savings account and you will earn an average of 1.98% as of today. In order to get value from a CD, you need a fair amount of money and more importantly, you have to put it in to a long range CD. 5 year CDs can earn you close to 4% but that's a long time for the average person to have money tied up. On a related topic, I've answered this question a couple of times lately and then heard it on a radio talk show just the other day:
"I just received a large sum of money from an inheritance. I don't know anything about investing so I want something safe where I can leave it alone."
My answer to that: I call it stacked CDs.
Take the entire amount and divide it up. Let's so you have $50,000. Divide it in groups of $10,000 and put it in to a 1yr, 2yr, 3yr, 4yr and 5yr CD. This way you have 10K available to you in one year. If you don't need it, buy another 5yr CD with it and keep turning it over like that. As markets improve, you may want to talk to a financial advisor about slightly more aggressive ways to invest your money but don't forget about the Certificate of Deposit as a safe way to make a little bit of money during a less than positive economy.
In today's economy, don't forget about the CD. It isn't the most exciting investment vehicles out there but exciting almost always means volatile. Make sure to balance risk versus reward.
Tim is the author of http://www.elementary-finance.com, a financial blog providing beginning investment and finance advice to those who have a desire to learn the basics of investing and finance.
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