# Help understanding CD investing. **URL:** \ **Category:** Factual Questions\ **Created:** [May 30, 2005, 6:55am UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069 "2005-05-30T06:55:32Z")\ **Posts on this page:** 11\ **Page:** 1
**Author:** ![ParentalAdvisory](https://avatars.discourse-cdn.com/v4/letter/p/53a042/32.png) [@ParentalAdvisory](https://boards.straightdope.com/u/ParentalAdvisory)\ **Post date:** [May 30, 2005, 6:55am UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/1 "2005-05-30T06:55:32Z")
I want to invest in some CD’s, but feel that I’m a couple sandwiches short of a picnic. What would make you more money with $10,000 (just a sample #) to invest in one year assuming a fix rated of 3.01% for a 3 month term compared to 3.85% for 1 year? I don’t think I have this right… An initial CD for $10,000 for 3 months would give me $301 after maturity. Assuming the rate is the same, I can reinvest my initial investment, plus my gained interest for another three months. I do this 4 times during the year: $10,301 (10,000 x 0.0301) $10,611 (10,301 x 0.0301) $10,930 (10,611 x 0.0301) $11,258 (10,930 x 0.0301) = $1,258 for the year, right? 😕 But if I invest $10,000 for 1 year at 3.85%, I only get $385 for the whole year? 😕 again. ---
**Author:** ![Dignan](https://avatars.discourse-cdn.com/v4/letter/d/f07891/32.png) [@Dignan](https://boards.straightdope.com/u/Dignan)\ **Post date:** [May 30, 2005, 8:04am UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/2 "2005-05-30T08:04:33Z")
I’m not positive, but wouldn’t the 3.01% rate be the APY for 12 months, just as the 3.85% is for the full 12 months? So you’re only getting the 3 months worth of interest (~ $75?) rather than a full year’s worth of $301. I don’t think it would make any sense for a bank to offer a better rate on a CD with a shorter term, since the bank would rather have you locked in for a year rather than 3 months. You say in your post to assume a fixed rate, but in real life that won’t be the case. The FOMC has its next meeting at the end of June. Here is a [calendar for the meeting dates](http://www.rightline.net/calendar/FOMC-Calendar.html). ---
**Author:** ![ParentalAdvisory](https://avatars.discourse-cdn.com/v4/letter/p/53a042/32.png) [@ParentalAdvisory](https://boards.straightdope.com/u/ParentalAdvisory)\ **Post date:** [May 30, 2005, 8:10am UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/3 "2005-05-30T08:10:43Z")
> [@Dignan](#): > > I’m not positive, but wouldn’t the 3.01% rate be the APY for 12 months, just as the 3.85% is for the full 12 months? So you’re only getting the 3 months worth of interest (~ $75?) rather than a full year’s worth of $301. Ok, I think that’s where my problem is. I assumed the interest rate was for the whole 3 months, instead of a year. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [May 30, 2005, 8:26am UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/4 "2005-05-30T08:26:23Z")
**Dignan** is right, the 3.01% is the APR for the whole year, but you are allowed to withdraw the money after three months. If you renew the CD four times then you will have earned $301 after twelve months. The one-year CD offers a higher rate because the bank gets to keep the money much longer. If you are certain that you won’t need to touch the money for a year, there’s no reason to consider the three month CD. In fact, your bank probably offers even longer ones with higher rates. ---
**Author:** ![iwakura43](https://avatars.discourse-cdn.com/v4/letter/i/9de0a6/32.png) [@iwakura43](https://boards.straightdope.com/u/iwakura43)\ **Post date:** [May 30, 2005, 1:42pm UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/5 "2005-05-30T13:42:18Z")
I’d like to mention that now is a pretty terrible time to be investing in CDs because interest rates are so low. What do you plan to use the money for, and more importantly, when? Short term instruments like this are fine if you’re just parking the money somewhere for a year or two before buying a house, but if this is your retirement savings, you should be looking for higher yields. (Sorry if I’m patronizing; but I don’t know your investment background.) Also ING’s Orange Savings Account (really a money market) is currently at 3% APY and that figure will increase as interest rates rise. Certainly preferrable to a CD at the same interest rate, for you don’t give up any liquidity. Google “ING Orange”. ---
**Author:** ![ParentalAdvisory](https://avatars.discourse-cdn.com/v4/letter/p/53a042/32.png) [@ParentalAdvisory](https://boards.straightdope.com/u/ParentalAdvisory)\ **Post date:** [May 30, 2005, 2:46pm UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/6 "2005-05-30T14:46:21Z")
> [@iwakura43](#): > > What do you plan to use the money for, and more importantly, when? You’re not patronizing, this is why I ask! 🙂 The recent thread on whether or not you spend your change got me to thinking about my change just sitting in a corner collecting dust that I’ve collected over the last 10 years. I figure that, plus I’ve got about a $1100 worth of EE Savings bonds that have since matured since 1992. I could be close to about $3,000 all together. I figure I should do something with it! Why not get free money on the change? But my little short term scheme in the OP isn’t going to happen. So I could probably do something with a higher interest rate in the CD arena (maybe 5 years?) that may be better then what the EE’s are collecting too. I figure why not merge them and earn more. ---
**Author:** ![iwakura43](https://avatars.discourse-cdn.com/v4/letter/i/9de0a6/32.png) [@iwakura43](https://boards.straightdope.com/u/iwakura43)\ **Post date:** [May 30, 2005, 6:40pm UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/7 "2005-05-30T18:40:40Z")
Ah, I see. This is long term savings then? Frankly, anyone with a time horizon of ten or more years needs equity exposure (that is, stocks). If you want a significant return on your investment (and who doesn’t), and not just some extra piddling change, read up on some of the many stock investing threads we’ve had. The power of compound interest is truly amazing; increasing your return by a small amount significantly increases your wealth. For instance: $10,000 compounded at 4% a year for 15 years = (10,000)\*(1.04)^15 = $18,000. Meh. $10,000 compounded at 8% a year for 15 years (not a terrible assumption for a stock index fund) = (10,000)\*(1.08)^15 = $31,722. Needless to say, $31k is a lot more than $18k 🙂 ---
**Author:** ![iwakura43](https://avatars.discourse-cdn.com/v4/letter/i/9de0a6/32.png) [@iwakura43](https://boards.straightdope.com/u/iwakura43)\ **Post date:** [May 30, 2005, 6:45pm UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/8 "2005-05-30T18:45:03Z")
By the way, it would be a mistake to lock yourself into a 5 year CD at this point. Interest rates are very low right now and continuing to rise. What if, three years from now, a 3-month CD runs 6% APY? If you had purchased the 5 year CD, you would still be earning a piddly 3.85%. The reason longer term instruments give you higher returns _right now_ is because they cut off the possibility of you earning more on your money later on. ---
**Author:** ![Dignan](https://avatars.discourse-cdn.com/v4/letter/d/f07891/32.png) [@Dignan](https://boards.straightdope.com/u/Dignan)\ **Post date:** [May 31, 2005, 6:57am UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/9 "2005-05-31T06:57:51Z")
**ParentalAdvisory** , I’m not giving you financial advice or anything, but … You might want to check on your savings bonds. If they’re from the early-90’s, you might have a decent rate (read: better than what’s available now) on those. I have some from that time period, and was surprised to hear the interest rate was around 4% to 4.5%. (Of course they _still_ haven’t fully matured.) It’s a better return than what banks are currently offering (I don’t even want to think about it), but remember that in the time from 1992 to today, if the same money would have been in an index fund, you would have a significantly larger amount than you do now. I have some family that gave me savings bonds, and while it’s great to have them, and it was nice of them to get the bonds for me, I get a graph in the back of my mind with the price of the Dow or Nasdaq mapped out. Sure, they aren’t as high as they were five years ago, but they are higher than they were 13-15 years ago. Just something to think about. ---
**Author:** ![ParentalAdvisory](https://avatars.discourse-cdn.com/v4/letter/p/53a042/32.png) [@ParentalAdvisory](https://boards.straightdope.com/u/ParentalAdvisory)\ **Post date:** [May 31, 2005, 9:25pm UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/10 "2005-05-31T21:25:54Z")
Thanks for the replys. I’ll definitely research this a bit more before I put it in the wrong place. ---
**Author:** ![asterion](https://avatars.discourse-cdn.com/v4/letter/a/4da419/32.png) [@asterion](https://boards.straightdope.com/u/asterion)\ **Post date:** [May 31, 2005, 9:42pm UTC](https://boards.straightdope.com/t/help-understanding-cd-investing/306069/11 "2005-05-31T21:42:52Z")
Definitely check the savings bonds. I’m getting about 4% on a bunch of Series EE from the early 90s. I’m going to let them keep going (they can run for about another 15 years) until I either need the cash or the rates are high enough that it makes sense to cash out and reinvest a bit more than $2000 in something else.