The Ponzi scheme run by Bernie Madoff and the newly-uncovered fraud allegedly perpetrated by Allen Stanford show that some returns really are too good to be true. Stanford purportedly defrauded investors on $8 billion worth of certificates of deposit (CDs) after promising impossibly large returns. To avoid getting caught in your own CD nightmare, make sure you choose the right CD for you -- and not necessarily the one offering the biggest interest rate.
CDs are a useful part of any savings and investment strategy, provided they fit your specific needs. Here are the basics: In exchange for an interest rate that’s generally higher than a savings or money market account, you agree not to withdraw your money before the CD matures. Maturities can be a few weeks or several years; interest rates typically go higher as the CD’s maturity increases.
Investors have plenty of options when choosing where to stow their cash, including non-traditional CDs that offer flexibility in exchange for slightly lower interest rates. For instance, if you think you might need to access your cash before the maturity date, you can always choose a risk-free CD that won't charge you an early withdrawal fee. Or, if you're worried about whether rates will rise between now and when your CD matures, choose a “bump-up” CD, which allows you to switch to a higher interest rate in the event that rates move higher during the time you hold the CD.
CDs can’t offer the same return potential as stocks, but they’re also a much safer investment than putting your money in the stock market. The Federal Deposit Insurance Corporation (FDIC) currently includes CDs under its umbrella coverage of $250,000 per accountholder per institution. Plenty of FDIC-insured banks offer high-yielding CDs that are safe investments. But when an institution that isn't insured by the FDIC offers returns that seem too good to be true -- as was the case with Stanford International -- your best bet is to look elsewhere.
Once you determine the best CD for your savings, start comparing rates among local and national banks. BankingMyWay.com’s CD Section shows you the best rates on FDIC-insured CDs in your ZIP . For instance, residents of New Jersey can get a 15-month CD from Third Federal Bank (Stock Quote: THRD) that offers 3.05% interest, a 12-month CD from Citibank (Stock Quote: C) that offers 2.3% or a 12-month CD from Bank of America (Stock Quote: BAC) that offers 2.25%.