Marino on Money: September 1

Q: What should I know about investing in CDs? When you purchase a CD, or certificate of deposit from a bank, you are literally loaning money to the bank. The two variables are the interest rate, which is what the bank pays you, and the duration, which is how long you loan the bank money. For example, a bank may offer to pay you 2% for a 6 month CD. But be careful. The interest rate is annualized. Meaning, if you owned the CD for one year, you would receive 2% in interest. But, if the CD is only for 6 months, you will only receive 1% in interest. That is one-half of the annual interest, because you owned the CD for only one-half of the year. Some CDs allow you to either add or withdraw money. Just ask your banking representative about these features. Also, make sure the CD is covered by FDIC insurance. Finally, understand that CDs are considered by some to be safe, low risk investments. In general, safe and low risk means low return. This is the trade off. CD rates are often less than inflation. Meaning, your money may not be growing as fast as inflation. Because of this, some people call CDs certificates of depreciation. If you have a financial question for Ross, you can use the Marino on Money page.

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Marino's last point should sound a warning in the ears of every potential CD purchaser. You will be hard pressed to find an economist who is not predicting huge jumps in the CPI, possibly even hyperinflation as soon as the economy starts a true, measurable recovery. We can't escape it with the debt this nation is amassing. With CD rates as low as they are right now, it would be wise to limit any CD purchase to a term of one year. The return will stink, but you'll likely be able to reinvest in a year at a higher rate. Those of us who recall the period of '76-'80 can assure you that you don't want to be locked into a long-term CD when rates take off. (Jan 21, 1976 Prime Rate = 6.75%....Dec 19, 1980 Prime Rate = 21.50%.)