Certificates of Deposit (CDs)

A certificate of deposit, while technically a type of bank account called a time deposit, is more like a bond—a "product" that you buy for a specified amount and that earns a fixed interest rate until the end of its term. When the term is over, you can redeem your CD for the money you originally invested plus the accrued interest. Unlike other investments, CDs are federally insured up to $100,000. CDs are offered by traditional banks, online banks, credit unions.

How They Work
When you purchase a CD, you invest a fixed sum of money for a fixed period of time, called the term. CD terms can be almost any length, from 6 months to 20 years. In exchange for "lending" the bank your money (the principal), the bank pays you interest, typically at regular intervals, throughout the term. You get the total amount (principal plus interest) at the end of the term. However, if you redeem your CD before the end of the term (called its maturity), you typically have to pay an "early withdrawal" fee or forfeit part of the interest it earned.

Brokers
Traditionally, CDs were issued by local banks, but nowadays its common to also see them offered by brokerage firms or independent brokers, called "deposit brokers," who can sometimes negotiate a higher interest rate from the bank since they bring in so many customers. Note that deposit brokers do not have to be licensed, certified, or approved, so before engaging with one, do your research. Call your state securities regulator or check with FINRA's (the Financial Industry Regulatory Authority) Central Registration Depository to make sure 1) your broker is registered with them (allowed to trade securities) and 2) that they don't have any complaints filed against them.

You can find your state securities regulator at NASAA's (North American Securities Administrators Association) website or by calling (202) 737-0900.

To contact FINRA, call 1-800-289-9999 or use their online BrokerCheck tool

Also important when using a broker is to find out which institution issued your CD because there's a possibility that, if you're loaded and carry your other investments through that institution, your FDIC insurance might not cover everything. You see, the way FDIC insurance works is that its limited to $100,000 for each depositor at each bank. So if you've got $50,000 in one investment and $60,000 in another at the same bank, $10,000 or that is uninsured by the FDIC. Granted, considering this audience, this is highly unlikely, but it's good to know nonetheless.

One more thing--sometimes brokered CDs are held by a group of unrelated investors--each of them owning a piece of a large CD. For instance, a broker could offer you a 1-year $2,000 CD, but in reality you're getting 1/5 ownership of a 1-year $10,000 CD. The reason they do this is because banks usually offer higher interest rates for higher principals. Hence, it can be a good deal for you. Just be sure that you confirm with your broker exactly how your CD will be held and get a copy of the exact title of the CD. Always, always save all your paperwork. Not just with brokers or CDs but with any sort of investment.

Penalties for Early Withdrawal
Apologies for the vaguely dirty-sounding heading, but this is quite important. Before you invest in a CD, you need to make sure you can do without access to that money for the length of the term, because if you have to pull out (OK, that one was intentional), you could end up losing money. Always find out what the penalties are before you invest. And beware brokers who tell you their CDs have no early withdrawal penalties; it could be true or it could be a bit of a trick. You see, if you are sharing the CD with other customers, the broker has to sell your share to someone else. This may not be a problem if interest rates have gone down since you bought in, but if interest rates have risen, the broker might have to sell your portion at a discount, meaning that you lose some of your principal. It's not technically an early withdrawal penalty, but for all intents and purposes it is. (The reason that interest rate changes affect the ability of the broker to sell your portion is that CDs operate within a market. If your CD is locked in at 5% but rates have risen so that now there are other CDs available that earn 7%, no one is going to want to buy your lower-earning CD. Conversely, if rates have fallen, your 7%er might be quite an attractive buy. The moral of the story here is to ask questions and get everything in writing, so you know what you're getting in to.

Interest Rates
In general, the longer the term of a CD, the higher the interest it pays. While the CDs traditionally have had fixed interest rates, there are now also variable-rate CDs available. The variations all work differently, so you'll need to check with your bank or broker to make sure you understand how and when the rate will vary. For example, some feature a "multi-step "or "bonus rate" structure where the rates change over time according to a set schedule. For others, the rates change according to market performance; they're often linked to a specific market index, such as the Dow Jones Industrial Average or the S&P 500.

Before investing in a CD, whether variable-rate or not, be sure to get the interest rate (and how it will change) in writing from the bank or broker and find out how often interest is paid and when and how you will receive it.

Bankrate.com has a useful CD interest calculator where you can enter a deposit amount, an interest rate and type of compounding, and a length of time that the CD would be held, and the calculator will tell you the APY and what the ending balance would be. It also has a more general search function that gives you the basic info for CDs available in your area.

Money-rates.com is definitely the best CD (and savings account) search out there, updating every few minutes, and listing daily specials with rates way higher than usual. Some restrictions may apply on some of the specials. They also have separate pages with listings for short-term CDs (less than 1 year) and for longer term CDs. Good deals can be found. The search-by-state blog, however, is less helpful.

Callable and non-callable CDs
Some CDs give the issuing bank the right to "call" the CD back--effectively ending your agreement--after a set period of time. When that happens, the investor receives their full principle (the amount they paid for the CD) plus any interest that has accrued up until the call time. Banks won't always call a callable CD, but they're reserving the right. Because, naturally, investors do not want their investments to be terminated prematurely, callable CDs usually offer slightly higher interest rates to make them more attractive. It's a give-and-take situation. For instance, if interest rates fall, a bank might choose to call its higher interest CDs, and you'll be out of the game. However, if you've invested in a long-term fixed-interest CD and rates rise, you'll be locked in at that lower rate.

So, very basically, if you're worried rates might fall, you might look for noncallable, fixed-interest CDs; if you think they might rise, you might go for a callable, variable-interest CD. Either way, there's a risk, but compared to stocks, bonds, and mutual funds, it's fairly minimal.

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Credit Unions

A credit union is a non-profit financial cooperative (and therefore exempt from federal and local taxes) that offers many of the same services as a bank, such as savings accounts (called share accounts), checking accounts (called share draft accounts), and CDs (called share term certificates), loans and online banking. Federally chartered credit unions can also write residential mortgages and issue credit cards. Because they don't have to pay taxes, credit unions can charge below-market rates on loans and also pay higher rates to their account holders.

Over 10,000 credit unions currently serve more than 79 million people in the U.S., and of all types of financial institutions, they consistently rank #1 in customer satisfaction. The vast majority of these credit unions are federally chartered and therefore regulated by an independent federal agency, the National Credit Union Administration (NCUA). In fact, there are currently fewer than 500 non-federally insured (state chartered) credit unions. To be safest, make sure yours is not one of them.

How they work
In order to participate in a credit union, you must be a member; all credit unions have their own requirements for membership. Typically, they are organized to serve people in a particular community, employees of one or more companies or industries, or members of an organization or association, and only those people are eligible for membership. Sometimes relatives of members are also eligible to become members, even if they do not meet the requirements.

Credit unions are democratically run and owned by their members, which is why they are allowed to be non-profits. Members pool their funds to make loans to one another. The volunteer board that runs each credit union is elected by the members.

Finding a credit union
The best site I've found for searching credit unions is the painfully obvious FindACreditUnion.com (run by the Credit Union League) because it lets you search by location, affiliation, ethnicity, and other common membership qualifiers.

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Checking Accounts

The purpose of a checking account is not to save or earn money, but simply to handle it conveniently. A few checking accounts earn a small percentage of interest, but most do not.

Not all checking accounts are created equal
When searching for a new checking account, there are several things to keep in mind:

1. Location, location, location: Having at least one bank branch (or ATM at the very least) is much more important for a checking account than a savings account. With a checking account, you'll probably be making transactions fairly often. You may need to cash a check, deposit a check or some cash, or make a withdrawal. If you don't have access to an actual bank branch with teller services, you can't cash checks or make large withdrawals (as ATMs usually have a withdrawal limit of around $250 per day.) Also, many people are wary about making cash deposits via ATM; the potential for the deposits to be lost or miscounted is higher than with checks, as cash is not traceable, and there is no teller there to verify the transaction.
   
   That said, it's also good if your bank has several ATMs around your city/state. That way, you can have access to cash when you're out partying downtown.
   
   
2. Account Fees: Look for a fee-free account. There's no need to pay $50 a year just for the privilege of having a checking account. Most banks have checking accounts aimed at students, and these almost never have fees. Beware of hidden fees like "minimum monthly service charges." If you're pretty sure you'll keep the account minimum (if there is one), then you don't really have to worry about low-balance fees. Just don't forget.
   
   
3. Online banking and bill pay: This is more important to some people than to others. But if you've never used it, you should know: online banking can be a life saver. Need to transfer money *right now* and can't get to the bank? No problem. Need to check your balance? Easy peasy. Want to save trees and stamp money by receiving and paying your bills online? You got it.
   
   
4. ATM fees: If you travel a lot, these can kill you. Almost no bank will charge you to use their own ATMs, but almost all of them charge you to use other banks' ATM. Find out what the bank's policies are regarding ATM fees (and partner bank ATMs, if any) before you open your account.
   
   
5. Interest: Most checking accounts right now pay half a percent or less in interest. Many pay no interest at all. If you can find one that pays 1 or 2 percent interest with no fees or catches, grab it. If not, no worries. Most people don't keep enough money in their checking accounts to accumulate much interest anyway.
   

Bankrate.com has a cool feature that lets you compare various aspects of checking accounts in your area, such as APY, account opening fee, annual fee, fees for bounced checks, required amount to open the account, required minimum account balance to avoid fees, whether they offer online banking, and ATM fees and surcharges. It's super helpful.


The Dreaded Bounced Check
When you write a check for more than you have in your checking account, your bank has one of two options. It can either front you the money and pay, or it can "bounce" your check/transaction. If it does pay, your check doesn't actually bounce, but your account will overdraft and the bank will usually charge you an overdraft fee. And if it doesn't pay, then you get charged a bounced check fee, plus whoever you wrote the check to might charge you a returned-check fee too. If you screw up and bounce a check for the first time, don't be afraid to ask your bank for a break, especially if you've been a good customer thus far. Sometimes, they'll be willing to waive or reduce your fees. Don't expect that to work more than once, though.


ATMs
ATMs (or cashpoints for all you Brits) are wonderful inventions, but they can be expensive little buggers if you're not careful. Banks love to charge access fees which will sometimes show up as unwelcome surprises on your bank statement. Normally your bank will only charge you an access fee (or surcharge) if you use an ATM owned by another bank, and often it's doubled because that other bank tacks on their own surcharge. (One transaction can end up costing $8. No joke.) Most of the time this isn't a problem because you know where the nearby branches of your bank are, and you stick to using those ATMs. It's when you go out of town (or out of the country) that it can become problematic. One temporary solution, if you only need a bit of cash, is to use your debit card somewhere for a small purchase, pack of gum, etc. (or better yet, something you need anyway) and then use it to get cash back. But if you know you'll be out of town, check your bank's website ahead of time and find out if they've got branches where you're going and where they are. Also, most banks have partnerships with banks from other regions that allow their customers to use any of the partner banks' ATMs either without a surcharge or with a smaller surcharge. This information can be found on your bank's web site or by simply phoning and asking. Make sure you find out 1) what ATMs you can use 2) how abundant they are in the area where you'll be traveling and 3)if there will be any surcharges.

Banking

Bank Accounts
There are two main categories of bank accounts: loan accounts and deposit accounts. The purpose of loan accounts is to hold a debit balance (where the account holder borrows money from the bank), and the purpose of deposit accounts is to hold a credit balance (where the bank "borrows" from the account holder). The type most of us think of when we hear "bank account" is the deposit account; popular types of deposit accounts include savings, checking, and certificates of deposit (or CDs).

Another way to categorize bank accounts is by their function—while some accounts are designed for frequent transactions (transactional accounts), others, such as CDs, are not.

Overdrafts
When a customer withdraws more than the account's available balance, an overdraft occurs. An overdraft, in essence, means the bank is providing credit to the account holder, giving the account a negative balance. If the overdraft is unauthorized (i.e. the account is not a loan account), the bank will normally charge an overdraft fee, often around $30, though if you call and ask nicely, some banks will waive your first overdraft fee, especially if you are a student or if it's your first time overdrafting.

The best thing to do to avoid overdrafts, of course, is to keep close track of all your transactions, and always be sure to keep a "cushion" of at least $50 more than you expect to be withdrawn (both directly and through debit cards, checks, and transfers) just in case you miscalculate. This number should be higher if the majority of your withdrawals are large ones. If you overdraft on your checking account by writing a check for a sum larger than your balance, it could result in a bounced check and additional fees.

They can do this every time you make a charge over the amount in the account. So, say you've got $50 in the account, and you use your debit card once for $60 and once for $10. Your bank can charge you the overdraft fee twice.

Sucks, doesn't it? Which is why you've got to diligently keep track of what's in your account. Write down everything in your balance ledger (or just keep a close eye on the account online). And don't forget to figure in any automatic payments you may have set up--or outstanding checks that haven't been cashed yet.

If you do overdraw, the only thing you can really do is put money in it ASAP (enough to cover the amount you went over plus the fee) so that you don't get charged any more. Some banks will even charge you every day you have a negative balance. If you're lucky and you catch it right away, your deposit might even make it in before the charge applies (but I wouldn't hold my breath).

Most banks offer what they call overdraft protection, or what I call a big fat scam. Some of them are set up like mini insurance policies--you pay a few dollars every month as insurance in case you overdraw, and then if you do, the bank won't charge you. This is often set up as a line of credit--the bank gives you a certain credit limit and if you overdraft, the remaining amount after your account balance hits zero is charged to this line of credit. This is a loan, and you'll have to pay interest on it the same as you would a credit card balance. Also, most banks still charge a fee (albeit a smaller one) every time the line of credit is used (every time you overdraft). Alternatively, some banks charge a monthly fee simply for the line of credit service, whether you use it or not.

Another kind of overdraft protection some banks offer is to link your account to another account at the same bank or to a credit card, so that if you overdraft, the bank can just transfer the required amount from the linked account so that your balance doesn't hit zero. The problem with these programs is that the bank usually charges a transfer fee, which while usually less than an overdraft fee, is still a fee and still sucks.

As far as I'm concerned, these forms of "protection" are hardly worth it when you consider the amount of fees associated with them. Still, it's a good idea to finding out what your bank offers as far as these programs; it's possible they might offer a good deal--but your best bet is probably just to be careful and make sure you keep a little padding in your account.

See also: credit unions, CDs, savings accounts, checking accounts

Reviews: Online Money Mgmt Tools: Mint, Quicken, and Rudder

A couple weeks ago I reviewed Mint.com, but I've recently been trying out two other free online money management tools, Rudder and Quicken.

Here's the rundown:


Speed
Of the three sites, Rudder loads and updates the quickest, and it's also the fastest at adding new accounts. (Mint is the slowest--it's kind of a pain.)

Account support
As I mentioned in my review of Mint, I can't for the life of me add my Dollar Savings account, even though their support team says it's been fixed. It must be something with the DS login system because Quicken doesn't support it either. Rudder technically does support it, much like Mint, and it even found and added my account. The problem? None of the info loads. Obviously, not very helpful.

As for types of accounts supported, Mint still comes out on top. Mint and Quicken both support various types of bank accounts, credit cards, and even PayPal! Very cool. But Mint is the only one that supports my Nelnet student loans. Rudder again, falls short as it only supports bank and credit card accounts. I did manage to add my Nelnet account, but it shows up all wacky because Rudder categorizes it as a credit card.

Interface
Rudder's interface is the least intuitive, and incidentally, the least functional. It offers no budgeting capabilities, which is my favorite thing about Mint. Quicken has good budgeting features, but they don't display as nicely as Mint--you can't see all your categories at the same time. Also, the Trends section of Quicken seems to be off--at least in my case, the graphs are highly inaccurate.

My verdict: I'm sticking with Mint, at least for now. It's definitely the most functional. And I like the interface a lot more than Quicken.

Review: Mint.com, free online personal finance service

If you haven’t heard of it yet, Mint.com is a free, online personal finance service (and according to their "About" page, “#1 in America”) that organizes all your bank accounts, loans, and investments—including retirement plans, brokerage accounts, vehicles, and real estate—in a place where you can view them all together. You can’t actually conduct transactions through Mint, but it allows you to use one login to view all the transactions, balances, etc. of all your accounts and to categorize your transactions for budgeting purposes. It can make organizing your tax deductions a hell of a lot easier, too, since you can tag your transactions as tax-related so that when you’re ready to file, you can easily find and list them all. And did I mention it’s totally free (and without any annoying ads or pop-ups)? I’ve been using it since November, and for the most part, I’m a fan.

Services
The most valuable service Mint offers is its highly visual budgeting features. It’s quick and easy to set up your own categories and specify spending limits for each category. Once you’ve done that (providing you do a good job of categorizing your transactions), Mint creates a bar graph of your spending for each month and even a date marker so you can see how much of your budget you’ve spent proportional to the time length of the budget. I find this very helpful in preventing the easy trap of overspending early in the month that leaves you without enough budget to get through the rest of the month. If you want, you can also have Mint send you alerts when, for example, you’ve gone over budget, your credit card bill is due, or one of your accounts has a low balance.

There’s also a Flash-powered pie chart you can view under the “Trends” tab that shows how much you’ve spent in each category (even in ones you didn’t list in your budget) relative to the total amount you’ve spent. This is a helpful feature, but it can be misleading because it doesn’t account for returns, refunds, or other income that specifically offsets your spending in a certain area. I’ll talk more about this towards the end of the article.

How can it be free?
Mint makes its money from referrals to banks, investments brokers, and credit card companies through the “Your Ways to Save” bar, which is unobtrusively placed at the bottom of the overview screen. If you’re interested, click on it and see what kind of deals Mint is advocating; they only suggest accounts that are “better” than your current accounts of that type in interest rate, cash rewards, etc. Of course, if you’ve already done your homework and gotten accounts with the best deals for you¹, Mint’s sponsored suggestions might not offer much improvement. Personally, I check the suggestions every once in a while, just in case they’ve found something I haven’t, but for the most part I ignore them.

Room for Improvement
I only have a few complaints about Mint’s services. First and most importantly, there are a few banks/investment companies they don’t connect with. They’re constantly adding connectivity, so hopefully this won’t be a problem for much longer, but at the moment it’s quite frustrating. I have my savings account with Dollar Savings Direct, and while Mint has recently added a link and form with which to add accounts from that bank, the link doesn’t work. (The error seems to have something to do with the way the Dollar Savings login page works, which is fairly complicated.) Not being able to add one of your accounts to Mint really screws up its functionality because you’re missing a big part of the equation.

There are two other malfunctions on Mint that are troubling as well. One is that, in my experience at least, sometimes the category labels you attach to individual transactions revert to default. I don’t know why this happens, and it doesn’t happen often, but when it does it’s definitely aggravating. The second is that there seems to be a fairly sizable delay in the display of transactions; transactions will show up on the online banking pages of my account institutions as much as two days before they show up on my Mint page.

This last complaint is more of a suggestion for added functionality than a gripe about existing malfunctions. As I mentioned earlier, several factors can throw off the pie chart, including returns and refunds. This problem could be solved easily by offering an option to factor in categorized “income” (or have it done automatically). It would also be nice to have an option to view a pie chart of average monthly spending by category and to be able to view or exclude selected categories from the mix.



[1] See the specific suggestions and how-to’s for each type of account on TiredofBeingPoor.net