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.