Many people wonder whether Certificates of Deposit (CDs) are really worth looking into, much less investing in. And there’s good reason for this with the high rates one may earn with a money market fund. Whether you’re interested in them or not, it’s nice to understand how they work. You never know when a CD might be just the thing for some situation.

The Low-Down

When one purchases a certificate of deposit, he/she invests a fixed amount of money for a specific amount of time. Typical durations are 6 months, 1 year, 18 months, or 5 years although this could vary. While the money is invested, the issuing institution pays you interest usually at regular intervals. You receive the original amount plus any accrued interest when the CD matures. It sounds simple enough, but there are a few things to look out for before you invest.

Watch Out For…

Most CDs come with an “early withdrawal” penalty. If you may need the money at some point during the term, a CD probably isn’t the right product for you. Any interest earned would probably be negated by the penalty charged. If you’re sure you won’t need the money during the chosen term, you won’t have to worry about this type of penalty.

You’ll also want to look into whether the CD you’re considering has a “call” feature. These are mostly found with longer term CDs. When a certificate of deposit is callable, the bank has the right to terminate the CD and return the principle and any unpaid accrued interest. The investor does not have this right. Banks will use this feature if interest rates fall and they can issue CDs at a lower rate.

You’ll also want to confirm the interest rate and know whether it’s fixed or variable. You should receive a disclosure document that details all of this information. You will also want to know when the interest will be paid, be it semi-annually or monthly. If something isn’t clear to you, make sure you ask all the questions you need in order to be completely comfortable with your decision.

With all of the ups and downs in the market these days, people are wondering whether it’s a good time to invest or pull out. There is a lot of fear in the market and investor perception is constantly changing. There are large gains seen on any given day followed by huge sell-offs the next. Amidst all this you may be wondering yourself what your best option or path forward is.

All of this activity in the equity markets can be summed up and described as volatility, and in times of increased market volatility it’s natural for people to be a little leery. Interestingly however, increased market fluctuations are actually better for an investment strategy known as dollar cost averaging.

Briefly explained, one invests a set amount of money at set intervals. For example, you would invest $200 every 2 weeks. As a result, a larger quantity of the underlying investment would be bought when the price is down and less is bought when the price is high. The average price of the investment over time is then necessarily closer to the lower purchase prices.

This strategy may be used in a stable market, but it’s benefits are greatly amplified in a more volatile market because of the large price swings. This strategy is not a substitute for choosing quality investments. It is more concerned with acquiring a quality investment at a low price point (on average). So don’t let the fluctuating markets deter you from investing. Just find a way to have the current conditions work in your favor and perhaps give you an advantage.

It’s an interesting question to consider. It also might be something worth trying out. I’m ignoring the fact that there are fixed expenses which technically could be averaged over every day. I’m talking about any product or service that you can choose either to purchase or not.

I’ve taken such a challenge and have tried not to spend any money until this Friday. This has been going on for just under two weeks now. I can tell you first hand that it’s not an easy task. I’ve put off shopping for groceries, or picking up fast food. I haven’t put any gas in either car attempting to make what’s already there last until Friday. I’m also not getting a haircut until after Friday.

Why am I doing all this? My credit card billing cycle ends on Thursday and any charges after that will occur in the next billing cycle, thus allowing me to defer them. Credit cards are a cash flow management tool and this is one way of using them as such.

It’s been awhile since I’ve talked about the Roth IRA and there are some important points to remember. If you’re a newer reader, you may want to go back and read Answering a Reader’s Question, Best of the Roth IRA, and Starting My Roth IRA. The options are plentiful when you’re looking into setting up a Roth IRA, but the benefits are pretty much the same no matter where you choose to set it up. I choose to have my Roth IRA with Scottrade because of all the options it offers me, but you may choose to go with another provider. Do whatever works for you.

For this year (tax year 2007) the maximum contribution limit is $4,000, and it will increase to $5,000 for 2008. After that, the limit will supposedly adjust in $500 increments in line with inflation. I say supposedly because as we know (or should know), the government can (and does) mess with it however they choose.

Not everyone is eligible however to contribute to the Roth IRA based on income. For single tax filers, the income limit is $99,000. Your allowable contribution amount will then phase out up to $114,000 where you no longer may contribute to a Roth. For joint filers, the limits are $156,000 to $166,000. If you happen to be above these income limits, I wouldn’t feel too sorry for yourself. There are plenty of other options available to you.

Another aspect of these types of accounts that many people are not aware of is that you can access a portion of the funds for qualified expenses. If you’re looking to save up for a down payment on a house, you’re allowed to withdraw up to $10,000 in earnings for such a purpose. Notice I said “earnings” here. At any time you’re allowed to withdraw an amount up to your actual paid in contributions because it was after tax money. For a new home purchase, you’re also allowed to access additional funds. Also, even though it’s called a “first time homeowner” distribution, you just can’t have owned a home in the prior 24 months.

Besides these and other nice aspects, it’s also nice throughout the year to be reminded to make those contributions. It doesn’t really do you any good to read all about the advantages of having one if you don’t set one up and contribute to it. We’re over half way through the year so you can gauge your contributions accordingly. Also, remember that you can still make contributions for 2007 up until the April tax deadline in 2008. Don’t use this as an excuse to put it off, but as a back up scenario. So, it’s time to evaluate your situation.

I was talking with someone today about a couple of real estate investments and he mentioned that he was going to go talk with a couple different accountants. This made me think about when I was looking for an accountant about a year ago. I also was looking for some advice about an investment, and for someone to handle everything come tax time. This is actually what I wanted to write about here.

There isn’t really a better time than now to look around for and interview accountants. The heavy tax season is over, and they have more time to spend with you answering questions and explaining things to you. A lot of people are also worried that they’re going to get charged for every minute that they spend talking with an accountant (I had this concern at least). Interestingly enough, it was actually quite different.

I had made an appointment to speak with someone on a recommendation (always a good start) and we scheduled about an hour. I went in with a list of questions, mostly about real estate investing and the tax implications (and benefits). He was very nice and was more than willing to answer all my questions and even point out things I didn’t know to ask about.

What did it cost me for such an informative meeting? Not a thing. You see, it was a win-win situation for the both of us. I was able to learn and have my questions answered, and he was able to make a good impression on a prospective (now current) client. And all I had to do was call and ask to speak with him.

What I’m getting at is that you can do the same thing. Take the opportunity to speak with a couple different CPAs and see what you can learn and how they can benefit you. Maybe you don’t need one (or think you don’t) yet. Whatever the case, this time of year is a great time for it. They’ll definitely have less time come the end of the year as we head into tax season.

I’m also sure that my accountant won’t mind the plug here on this blog. His name is Dave Peterson at Haynie and Company (this is not sponsored). They’re based in the Salt Lake City, Utah area, but they do work for clients all over the U.S.

Also, if for no other reason, it’s worth taking the time to talk with someone solely for the knowledge that you can gain. It’s yet another step towards mastering your finances and reaching your goals.

There’s an important distinction that I want to make clear for people when it comes to the interest rates that are quoted, be it on loans (interest you pay) or on an investment (interest paid to you). When you’re looking into a financial product, realize that what you’re being quoted is best suited to the providers purposes.

If you’re looking for a loan or comparing interest rates on credit cards, you’ll typically see the Annual Percentage Rate (APR). Even though it says it’s annual, it doesn’t take into consideration any effects of compounding. Therefore, you should realize that the actual effective interest rate could be higher than what you’ll see advertised.

When you’re comparing savings accounts, money market accounts, or any other interest bearing account you’ll typically be quoted the Annual Percentage Yield (APY). This figure does take into account the effects of compounding so it could be an inflated figure.

You can see how these two different figures suit the purposes of either the lenders or the account providers. It’s not necessarily going to make a huge difference, but it’s an important distinction to understand regardless.

There’s a term used in economics called the opportunity cost. As Wikipedia defines it is:

the cost of something in terms of an opportunity forgone, or the most valuable forgone alternative, i.e. the second best alternative

This concept stems from the economic premise of scarcity of resources. Because of limited resources, choices must be made of how to employ these resources, and whenever a choice is made, there is an opportunity cost.

Although this concept can be uselessly taken to the extreme, it can provide valuable insights into some of the decisions we face and choices we make. Two of the most prevalent areas where this concept can be applied is with our money and our time. Both of these meet the criteria of being limited resources.

Your Time

What you do with your time, more importantly your “free time”, largely determines your level of success. Whatever activities you choose to engage in, you do so at the exclusion of some other alternative. For example, by sitting down and watching the latest installment of your favorite television show, you’re giving up the time in which you could have been accomplishing something else. Perhaps you could have been brainstorming ideas for a business you’d like to start. You could be researching investment opportunities. You could also have been reading one of the great classics of literature that you’ve always wanted to read. It’s not inherently bad to participate in recreational activities, or any activity for that matter; just remember that there is an opportunity cost associated with that choice.

Your Money

The choices you make with your money now will greatly influence your financial future. There is always talk of how much something costs or what it’s going to set you back. There isn’t, however, much discussion of what the true, or opportunity, cost is. Say you decide to purchase the new iPhone. It’ll cost you about $500. Now take a step back and think of other alternatives that you could have used that money for. Perhaps it would have helped you out with the next mortgage payment, or you could have started an emergency fund with it. You could have also invested that $500 and tap into the miracle of compounding. Some of these other opportunities should be a part of your thought process and decision making. The true cost of the new gadget may actually be far more than the listed price.