When you invest in a CD, you pick the term until your investment matures. At maturity you’re able to take your money without a penalty. The term may be shorter than your college term or longer than it takes you to get a degree.

Most financial institutions offer a variety of terms, each paying a different interest rate. You might need to choose a CD offering any of the following terms:

• 1 month
• 3 months
• 6 months
• 12 months
• 18 months
• 24 months
• 30 months
• 36 months
• 60 months or much longer

Your choice of the term for the CD you invest in is based on:

• When you’ll need the money
• Where you think interest rates are headed

Interest Rates

The Federal Reserve, or the Fed as the financial wizards call it, is in charge of our nation’s money supply. At the risk of being overly simplistic, here is the Federal Reserve’s strategy:

• If inflation is escalating, the Federal Reserve will usually raise interest rates. Rising interest rates usually curb consumer spending by encouraging people to save money and earn interest and by discouraging purchases on credit.
• If it looks like the country is headed for an economic downturn, the Federal Reserve will normally lower interest rates.

The interest rate on CDs fluctuates widely from year to year. For that reason, it’s difficult to decide how long to tie up your money. If you think interest rates are going higher, you may want to select a CD with a short term or an investment where you’ll have easy access to your money. If and when interest rates rise, you will be in a position to invest in a new CD.

There will be times, when the interest rate paid on CDs is low, the return on your investment will barely keep up with inflation. There will be other times, however, when CD rates far exceed the rate of inflation.

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