First Century Bank of Gainsville, Georgia has by far the best APY of three month CD interest rates available, standing at 1.35 percent at this time.

I’m doing a review on them because they are the best rates at this time for a place to put your short-term money, but also as a quick lesson in understanding the give-and-take related to good interest rates on safe investment products.

Normally when you’re offered the highest or close to the highest interest rate for safe investment vehicles, there’s a caveat that comes with it, and in the case of the 3-month CD from First Century Bank, that is a minimum deposit of $10,000.

There are other banks offering fairly close interest rates on 3-month CDs which require far less deposits. For example, there is one that offers a 1.10 APY which requires $0 for a deposit and no monthly fees (as of this writing). Another offers a 1.21 APY with only a $1,000 deposit required.

Banks can also offer 3-month CD rates that compete internally with one another; with smaller deposits required for a smaller interest rate.

Obviously if you have the capital on hand, there’s no complications as to the decision to make: the highest APY is the only way to go. But even then, as in the case of the 3-month CD from First Century Bank, there are other competitors who require a $10,000 deposit who have an interest rate far below the APY First Century has. So just because there’s a large deposit required doesn’t mean the interest rate is competitive. I’ve seen just today as I was writing this an $10,000 deposit only giving you 0.50 interest on a 3-month CD.

This isn’t rocket science, just ask a couple of questions when you’re searching around for the best performing short-term CD to be sure you’re getting the best rates you can. Don’t assume anything.

As far as the strategy of investing in a 3-month CD, the reason you do that is because of the unsurety of the interest rate environment we live in, along with inflationary pressures, which have already put the squeeze on consumers in regard to certain products and services.

A short-term CD allows you to get a decent return while keeping your money safe, and at the same time not tie it up in a way that inflation or rising interest rates make it a bad investment. 3-month CDs are one way you can protect yourself while building up your wealth a little and having your money available in a short time when interest rates and inflation start to rise.

Not only is Discover Bank offering a great rate of 1.90 APY on their 12-month CD, but includes a great provision concerning if you lose your job. In that case you can withdraw your money if you need it without any early withdrawal penalty. You need to open it by December 31, 2009 to get the benefits and rate.

Keep in mind concerning the job loss provision that it has to be involuntary, as you can’t just quit your job and then withdraw your money. But if you are terminated or laid off, suffer a strike or are locked out from work in any way, you get the benefit. A leave of absence, quitting or retiring doesn’t trigger the removal of the early withdrawal penalty. Still, a great feature in difficult economic circumstances.

For those who are self-employed at the time of opening a CD with Discover Bank, an act of God like a fire, property damage in general, inventory damage or closing of the business for fire or flood must be experienced to be able to withdraw your funds without a penalty for early withdrawal. For business owners or contractors you must have an account open for 30 days or after renewal to receive the benefit.

While this may sound restrictive to some, in reality if you operate in good faith these are very reasonable, especially considering the high rate of return offered and the possibility of a no-penalty early withdrawal under circumstances out of your control.

For employees, to qualify for the CD you must work at minimum of 30 hours a week, while if you’re a full-time student you can qualify if you’re 15 hours a week or more.

A minimum balance of $2,500 must be maintained to get the $1.90 APY and benefit of penalty-free withdrawal if you qualify and need it.

Considering the national average for a 12-month CD at the top 50 banks as measured by deposits is 0.70, this is a really great return.

Discover Bank also offers an 18-month CD at a 1.95 APY.

Ascencia, a division of PBI bank, offers a good return of 1.63 percent APY on its 6-month CD, based on a 1.62 percent return compounded monthly.

For an initial deposit the minimum is $500 and the maximum $250,000. All accounts are protected for up to $250,000. An extension of the Emergency Economic Stabilization Act of 2008, which increase deposit protection from $100,000 to $250,000 per depositor has now been extended to December 31, 2013 by Congress, and all CD accounts a Ascencia fall under those guidelines.

Here are some of the other CD rate offered at different maturities by Ascencia. All of these have a $500 minimum on the initial deposit and a maximum of $250,000.

1 Year CD (12 Months) 1.98% with a 2.00% APY
2 Year CD (24 Months) 1.98% with a 2.00% APY
2.5 Year CD (30 Months) 1.98% with a 2.00% APY  
3 Year CD (36 Months) 1.98% with a 2.00% APY 
5 Year CD (60 Months)  2.25% with a 2.27% APY

Notice that all of the CDs from 1 year to 3 years offer the same interest rate of 2.00% APY. Unless you believe rates will rise above that, the 1-year CD would be a better way to go. If you believe interest rates will decrease below that, a longer term CD would be better to invest in, as it would lock in a better rates.

Be sure you are committed to any of these CDs, as you aren’t allowed to withdraw any funds from the accounts for a 90-day period, and of course there will be the usual early withdrawal fees applied of you decided to withdraw funds after that.

A CD continues to be a good place to safely park your money, and the early withdrawal penalities are actually good for you, as it forces discipline on you unless you absolutely need the money in a major emergency situation.

While October was a poor month for CD rates, as almost all CD rates dropped, from 3-month CDs to 5-year CDs, TotalBank was still able to hang on with its Total e-CDs, to lead in the 3-month category, with a 1.64 interest rate for their online-only CD. CDs with a length of 3, 6, 9 and 12 months also offered a 1.64 interest rate, with a 1.65 APY when investing a minimum of $1,000.00.

Even though TotalBank has participated in the overall drop in CD rates for the month of October, they still continue to lead the way for 3-month CDs with the 1.65 APY they offer at this time. For all of October, 3-month CD interest rates dropped 3 basis points in the industry, which has experienced an overall plunge of 82 basis points so far in 2009.

Along with the fall in interest rates for 3-month CDs in October, 6-month CDs, 1-year CDs, 2-year CDs and 5-year CDs also fell from the month before, with the 6-month CD dropping by 9 basis point in October; the 1-year CD by 10 basis points; 2-year CDs fell by 7 basis points and 5-year CDs were off by 6 basis points.

For the 3-month CD, it fell from 0.64 percent to 0.41 percent for the month of October, one of the lowest levels in 20 years, as measured by a weekly survey performed by Bankrate during that time. 

Still, as measured in this economic climate, TotalBank continues to offer the highest-yielding 3-month CD on the market, which is has done over the last four months.

Long-term CD rates fell faster than short-term CD rates, but even so, they are still standing at record lows.

I would still look at investing in short-term CDs or other short-term investments going forward, as it relates to safety, as long-term, safer investments could and have been getting clobbered in this low-interest rate environment.

So with the money you’re investing to protect and hold, a short-term CD like the 3-month CD offered by TotalBank is a good way to go at this time.

A brokered CD is about as easy to understand as a regular, fixed certificate of deposit, as the difference between each on is just what the name implies: you buy it through a broker.

Immediately you’ll think this is a colossal waste of money, as you’ll either be charged a flat fee from the broker, or possibly a percentage for each $1,000 invested, or something similar to that.

For those that are Web-savvy, this first reason for investing in a brokered CD may not sound that valuable, but for many people who use the Internet but aren’t familiar with how to navigate and do fast, accurate searches it is, and that is the availability of a large number of CD options from banks around the country, which your broker should easily be able to access and help you find. Many people in this situation also aren’t familiar with the variety of CDs and their terms (the reason I’ve been writing exhaustively about it recently), so a broker makes sense to them.

The temptation of using a broker to buy you the best available CD on the market is to get one with much higher interest rates than other CDs, without knowing what kind of protection you’re getting. Be sure to ask the broker if the CD is insured by the FDIC. Not all of them are, so that’s a must to know if FDIC insurance is an important part of your financial decision-making process. If an interest rate sounds real high, you’ve got to understand that you’ve assumed more risk.

I’m not talking about small differences in interest rates here, I’m talking about something that may be far higher then the best known regular CD interest rates. So don’t go getting paranoid if you’ve found a good interest rate. Be wary if it’s way above the highest one you could find. In that case be sure your broker knows your risk tolerance so he stays within those parameters for you.

So other than someone that doesn’t understand the Web or a certificate of deposit, what would be the reason for using a broker to acquire a CD?

I’ll use the example of shopping at Wal-Mart. If work 10 hours a day and make $50 an hour, would it be worth your time to go to Wal-Mart for an hour of shopping to save $15. The obvious answer would be know, and many people that make a nice amount of money in a day understand this.

Many of those in business who assess a certain amount of money per hour to their time have this down, and so while knowing they could save money, the cost in time would make that savings not worth it to enjoy. On the other hand, people who don’t make that much an hour or who don’t put a price on their time, will go to Wal-Mart, knowing that overall they’ll save money by shopping there. So if they make $10-an-hour and save $25 while shopping, it’s definitely worth it to spend the time.

That’s the same with a brokered CD. Even if you understand how all the process works, it could be more costly to do the search and take the time to set up and account and place your money than it’s worth. You could very easily save money by focusing on what brings in your $50-an-hour than on a few dollars extra in fees. That’s what the value of a brokered CD is for the most part.

There are some other things that can get a little complicated like being able to sell it on the secondary market, but that’s an entirely different story, and probably doesn’t offer much to the seller unless a buyer is available willing to pay the full value of the CD. Buyers on the secondary CD market are also few and far between, and even if you could find one if you wanted to sell your brokered CD early, it could possibly cost as much as just taking the penalty and getting your money.

In the end, a brokered CD is a good way to buy one if you’re clueless as to finances and want a good interest rate on your CD, or time is a major factor and an extra fee is well worth the savings in time and money you get from doing what is the most profitable with your valuable time.

An Add-on CD is a certificate of deposit with a fixed or variable rate where you can continue to make deposits over the term of the CD.

A little later we’ll get into the purpose for investing in an Add-on CD, but for now let’s look at some of the differences in order to understand what you’re investing in.

While there are no basic differences between a fixed or variable CD or an Add-on fixed or variable CD in and of themselves, the obvious difference is the adding of money to the certificate during its term, otherwise it functions as a normal CD with all its usual functions and protections.

The difference you’re looking for is like any other CD, where there are minimum opening deposits, and also in some cases, minimum additional deposits. There are also some Add-on CDs which require a minimum amount on a monthly basis. For example, you may be required to add $50 a month for the duration of the certificate. This isn’t bad if it falls within the parameters of your investment strategy.

As with any CD, you must be aware of the automatic renewal window, which allows only a certain amount of days to close the CD or allow it to renew.

So why bother with a CD like this at all? In our existing economic conditions, cash is the ultimate contrary asset to hold in the world right now, and so is a good time to hold some, as many people in America are starting to do.

To that end, all of us should have a stash of cash socked away for emergencies, possibly even a little higher than the usually suggested three to six months worth in normal economic times in case of unexpected circumstances. If you’re able to, I would even put away as much as nine months to a years’ worth of cash to protect yourself against the poor economy.

With that in mind, why an Add-on CD works so great is it gives you the option of putting away and building up cash in a way that forces some discipline on you. If you attempt to take it out, you’re hit with a stiff penalty, which is good in my estimation, as it keeps you from spending it on whims and not on truly unexpected things as the consequence of hard times.

One other nice thing about an Add-on CD is it allows you have a shorter waiting period for your money as the CD matures. In other words, if you pay some into it every month, that means it’ll be less time you have to wait for your money as it continues to bear interest for you and build up your personal cash reserves.

If you have a safer investment that could provide better and more flexible returns, you could then put your cash in that to continue to build it up without having to wait long periods of time with all your money. So money you put in over the last several months of an Add-on CD is only tied up for that period of time until the CD matures, and then you can decide from there what your next step will be in reference to building up your cash reserves.

The point is an Add-on CD is a great place to build up your cash on a monthly basis without tapping into it like you easily could with a money market fund or money market account. That’s a good discipline to have when it’s imperative to have some cash on hand during these difficult economic times.

A variable interest rate CD is different from the fixed rate CD in that it is tied into the movement of current interest rates – whether up or down – while the fixed CD interest rate remains the same throughout the duration of the term. So with a fixed rate CD you know what you’ll make over the term of the CD, while with a variable rate CD you won’t.

The strength of a fixed CD is its safety and predictability, while its weakness is if interest rates go up, you don’t get to participate in the better situation; thus the reason for the creation of a variable-rate CD by financial institutions to address that situation.

With a variable-rate CD, if interest rates rise, your interest rate on the CD will rise with it, and if it falls, your interest rate on the CD will fall as well, giving some downside risk. For example, if you have a fixed rate CD and interest rates fall, you will still be able to collect the higher interest rate from the CD.

What this means is we must be aware of the interest rate environment we are currently in to determine the best type of CD to buy. In our current interest rate environment the U.S. government is holding interest rates down in an attempt to stimulate exports and hopefully stimulate the creation of more jobs, or at minimum, keep them from falling even further in the manufacturing sector.

Consequently, the current low interest rates mean that have nowhere to go but up, yet there’s a lot of questions as to the political will to allow that to happen. The thing that must be considered at this time then is when interest rates will be allowed to go up; that ’s what determines your decision on the type of CD to buy.

If you believer after looking over the overall situation that interest rates will be raised by the Federal Reserve sometime soon, a variable rate CD could be a great way to invest for your safe money. You would probably get similar rates to a fixed CD, yet with upside potential. All of this depends on what bank or financial institution you do business with or buy the CD from, so all that has to be included in your decision-making process and where the interest rates will stand when the variable-rate CD is bought.

In a rising interest rate environment, when comparing a variable-rate CD versus a fixed rate CD, the variable-rate CD will do better.

Finally, check with the institution you plan on buying a variable-rate CD from as to how the interest rates are determined or measured. Banks tie the interest rates of the CD into different instruments, so you want to know what they are. Some, for instance, may track an interest index, while others may tie the interest rates to a U.S. Treasury Note. Either way, you should ask what is the determining factor in the movement of interest rates as it relates to your variable-rate CD.

8In our continuing coverage of CDs, this article we’ll talk about callable CDs, which as with all investments, offers pros and cons if you decide to invest in one.

The first thing to understand with a callable CD is it can be returned by a financial institution before the term ends, along with whatever interest has built up during that time. Along with that, there is included what is named a call-protection provision, which guarantees you will own the CD during that period at the interest rate offered. For example, if you acquired a 3-year CD, it may be callable after you hold it for six months. At that time the bank can end the deal and pay you the principle and interest for that period, without continuing on with the contract.

I want to interject here concerning the reason in talking about CDs in all the various ways you can invest in them; it’s so you can not only discover what’s available out there, but more importantly, to understand what each one has to offer and why. This helps you become a better investor, even if you decide to go outside the relative safety of CDs into another type of more risky investment.

With that in mind, what value would it be for someone to invest in a callable CD, and why would a bank or financial institution offer one?  From the point of view of the bank or financial institution, it shifts the risk concerning interest rates away from the bank to the one buying the CD. Banks are managing their loan portfolio as it applies to interest rates of their deposits, the reason a callable CD is offered.

Why would we want to do something like that? It’s all about return on investment or interest rate yields; you get a higher interest rate for bearing the risk. This isn’t risk to your money invested, but risk as to returns.

During the period of time you own the CD, if interest rates fall, you then will have the bank “call” the CD if the call-protection period is over, causing to lose the higher interest rate you originally had.

How do you determine whether to invest in a callable CD or not? It’s all related to the interest rate environment and if your research shows it’ll fall, plateau, or go up.

The downside for the investor is if the callable CD is in fact called by the bank, it would force the investor to invest at lower interest rates, receiving less on their money.

We’ve been talking a lot about CDs lately on Savingtoolbox.com, and I’m going to continue on with that theme for awhile, as in low-interest rates time like we’re in, banks usually offer up a bunch of diverse CDs to customers to provide a variety of options to suit individual needs, and also to entice them to park their money using some dangling carrots of higher interest rates and flexibility for those looking for better but safe interest returns.

Some of these CD products are called different names by different banks, and sometimes in different parts of the country, so it can become very confusing to those shopping for banking products. For example, we recently looked at what is called bump-up CDs, which can be used to take advantage of higher interest rates, but the owner has the responsibility to check in with their bank sometime in the duration of owning the CD to tell them they want to bump it up to a higher interest rate.

Now with something called a Step-Rate CD or Step Up CD, it’s a little different in that there are guaranteed interst rate increases which the buyer doesn’t have to be concerned about watching, but automatically kick in a specific intervals of the term of ownership.

For example, a 4-year CD may start off at a 4 percent interest rate for a year, and then jump to 4.5 percent after 24 months, and on up as it matures.

What you want to do with something like that is add up the interest rate offered during the term of the CD and divide them by four, or however many years you have it to get an average interest rate for the overall period you own it. That guides you as to whether it’s a good deal or not.

Many Step-rate CDs will be for less time, but still offer interest rate increases at intervals of seven months and so on, so you can still divide by the number of increases over the length of the CD and get the average interest rate for the period of time you own it.

So the difference between a bump-up CD and a Step-rate or step up CD is you’re guaranteed an interest rate at specific intervals and specific rates while you own it. Bump-up CDs on the other hand, only guarantee that you can bump up the rate sometime during the time you own it. Sometimes it’s more than one time, but with many bump-up CDs you only get one crack at it. You’re still guaranteed a minimum interest rate, but it’s less certain as to how much it’ll increase, as it depends on the market.

Step-rate CDs are for those who want certainty and guaranteed returns they don’t have to think about. Bump-up CDs are for more hands-on people who want the chance to make more on their interest rates by watching the market carefully and timing the interest rate bump for the best possible increase.

If these types of CDs are called something different when you’re checking them out, just remember the differences shown in the above paragraph and you’ll understand what they do no matter what name is applied to them.

Hudson City Savings Bank (OTC:HCFB) which serves the Connecticut, New Jersey and New York markets, is now offering some of the best CD rates in America, paying out 2.50% APY on 24-month certificates of deposit and a 3.00% APY on 36-month CDs.

As far as I’ve been able to find, there are no other banks that offer higher CD rates than this, although Flagstar Bank is offering the same interest rates on their 36-month CDs.

Here are the current terms of the CD as of this writing:

• 3.00% APY 3-Year CD ($5,000 minimum balance)
• 2.50% APY 2-Year CD ($5,000 minimum balance) 
• 1.75% APY Internet Money Market Savings ($2,500 minimum balance)

If you want to invest in the 3-Year CD, it’ll cost you $5,000, but if you live in the three states Hudson City Savings Bank serves, you can get in as low as $500. 

There are no other local limitations, and you can apply for the CD at the national level, i.e. it doesn’t matter where you live in the U.S., you can get in on the great interest rates.

Hudson City Savings Bank has been named as “The Most Efficient Bank” more than once, which allows them to offer better rates than the majority of their competitors, as you can see with the CD rates I mentioned here. They have 125 branches in the 3-state area they physically operate in.

CDs acquired from Hudson are insured by the FDIC for up to $250,000 until the end of 2009, where, along with all banking investments, will revert back to the former $100,000 per customer, unless that is changed. For now that is the known circumstances concerning insuring all banking accounts under the FDIC umbrella.

Do go to the bank’s web site to confirm the CD rates, as then can change quickly. But as of October 2, the CD rates stand as I’ve written here.