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Let good sense, not ego, guide CD buying

Question: At 86, I prefer to put my money in certificates of deposit at my bank. Which would be better for the $10,000 I need to invest now: a 12-month CD paying 3.15 percent or an 18-month CD paying 3.45 percent?

Answer: This gets at the problem I call water-cooler machismo. It afflicts people who search for investments or borrow money for homes, cars or other purposes.

Basically, it involves the bragging rights that surround interest rates. Get a mortgage that charges a quarter of a percentage point less than your neighbor or co-worker pays, and you feel like a winner. Get a little extra return on your CD, and it feels like you're beating the system.

The problem with water-cooler machismo is that it allows one issue _ the interest rate _ to dominate a decision when other factors should get equal weight, sometimes more.

For a balanced look, use dollars rather than rates. Over a year, the 12-month CD at 3.15 percent will earn you $315. The 18-month CD at 3.45 percent will earn $345 over the first 12 months. (Actual amounts could vary slightly depending on the method of compounding _ daily is best.)

The difference is only $30 a year. Sure, it feels good to get a higher rate, but in this case the extra income is miniscule. So other factors may be more important.

What, for example, would be the penalty if you redeem your CD early?

Penalties vary, but typically you lose three months' interest earnings if you demand your money back early on a CD with a term of two to 18 months. (It costs six months' interest on CDs with longer terms.)

Suppose you really wanted to tie your money up for no longer than a year but bought the 18-month CD to get the higher yield. If you redeemed it in 12 months and lost three months' interest, the penalty would cost $86.25. In that case, the more generous CD would end up earning you $56.25 less than the 12-month CD with the lower rate.

Of course, that's not such a terrible sacrifice. If you think there's a good chance you'll keep the 18-month CD for the full term, you might as well get the higher rate _ knowing the consequences won't be too bad if you change your mind.

With interest rates as low as they are today, penalties are so small that early redemption can be a good move if conditions change.

Just be sure you know about Just be sure you know about the penalties before you invest. Also make sure there are no other fees that could change the math.

I'd also consider convenience. Is the bank easy to deal with when you want to do something with your account?

If you are searching for convenience and good customer service, you don't need to limit yourself to the neighborhood bank. Many newspapers, including the Times, provide weekly lists of banks offering CDs with the highest rates. Or you can get this information from the Internet. The rate-tracking company Bankrate.com has a good one at www.bankrate.com.

A CD shopper who does not have a computer can get help surfing the Net at any good library.

I wouldn't go to too much trouble, though. As we saw, gaining a fraction of a point in yield doesn't put much money in your pocket, and it might not be worth the hassle of dealing with a distant institution. After all, the chief benefit of CDs is the government-backed insurance that protects your money, and you can get that at any federally insured bank.

_ Jeff Brown is a business columnist for the Philadelphia Inquirer.

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