I Just Bought A Cd ( How And Why To Invest 101 )

So Cd is a Certificate of deposit, and it’s a negotiation between you and the bank. The idea is you usually get more money than you would with regular high-yield savings, but of course it’s going to be at a cost and the cost is going to be time.

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1. Explain CD Basics
– A Cd is a certificate of Deposit
– And you enter into an agreement with the bank, to lock your money up for a certain amount of time, and for that, they will pay you more money
– The payout usually is every month

Why the bank does this:
– Remember, the bank makes money by grabbing your deposits and lending it out and making more money
– So if you have deposits that keep coming in and out, it is worst than when you have a deposit for a fixed amount of time
– This way it’s predictable

Can I take the money out:
– Yes but usually it will involve some sort of penalty
– No they won’t take your money, but they will take interest
– Here and some of the penalties that Discover has

For example:
– If the agreement is for less than a year they take 3 months
– 1-4 years they take 6 months
– 4-5 years they take 9 months

2. Is it an investment?
– It depends but more than often it not an investment and it was it would be a lousy one
– Remember an investment, you putting your money into something, making a good return on it, and assuring you get your capital back
– Also it’s important that you know what you are investing in, and compare it to other opportunities in the market

Things to consider ( right now for a 1 year CD I can get 5.20% APY )
– Taxes: 20%
– Risk: The risk of you losing your money is minimal, but exists if the bank goes bankrupt ( but you should be good for up to 250k )
– Compare to other opportunities: I could make about 10% in the stock market
– Inflation is about 3.5%

Think about it:
– If you have a 5% return, after inflation and taxes you’re really making close to 1% or so
– So that’s why it’s a poor investment
– And I wouldn’t consider it an investment

3. Why am I buying
– I have money that I need to park for at least a year or 2
– It’s the money I got from the sale of my home early this year
– And the idea is that money is only going to be used for buying another house

Questions:
– Why not invest it in T-bills ( I can but I would roughly the same amount of money but the payout would be every six month )
– But I would consider a bond for 2 years, at a payout of above 5% ( that is interesting )
– Why not invest in the S&P 500: obviously that would be much more risky
– Why not just leave it in a High Yield Savings

4. How will I go about buying my CD if I choose to buy it
The first way is: with a Bank ( buy the CD directly with them, and they should be FDIC Insured up to 250k
– Second is Broker via Broker like Vanguard: I can get a little more money

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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