CD rates fall to all-time lows

Interest rates on bank certificates of deposit are at their lowest levels ever, Market Rates Insight reports. "For the first time since 1952, the average rate for all CDs dipped below 1 percent," Dan Geller, the firm's executive vice president, told Reuters.

That's bad news for savers, but, as Geller points out, "what's the alternative?"

Savers who want to keep their money in FDIC-backed banks -- but need to squeeze out return -- don't have many options. However, here are some ways to make the most of that money.

Keep it in perspective. Small savers may be hardest hit by the continuing decline in rates, but they also have the least to gain by shopping around. If you have $10,000 to put into a CD, the difference between 1 percent and 1.3 percent is $30 for the year. That's probably not enough money to justify spending hours searching for the best possible rate. It may be more worthwhile to keep your CD at your neighborhood bank, where it could help you qualify for free checking.

Index. CDs that link their returns to stock market returns or inflation usually offer lower rates to start than fixed-rate CDs. But in this environment, they are likely to end up paying a better return, says Geller. Similarly, step-up CDs, which will adjust interest rates up as market rates rise, could end up paying higher interest going forward.

Shop far and wide. Typically online-only banks and credit unions offer better deals on deposits than the big bricks- and-mortar megabanks. Use comparison shopping sites like Bankaholic and Bankrate to find the best available rates.

Build a Ladder. CD savers are often told to "ladder" their CDs by splitting their cash into several different CDs of varying maturities, and then renewing each one individually for the longest term. So, for example, an investor with $50,000 might put $10,000 each into a one-year, a two-year, a three-year, a four-year and a five-year CD. As each matures, the investor would trade it in for a five-year CD. In four years, all of their CD funds would be invested at the (presumably higher) five-year rate. But 20 percent of their funds would be freed up every year to reinvest at rates that most pros think will be higher in future years than they are now.

Just give up on CDs. Unless you can find a better-than-average deal, you probably aren't being paid enough to justify locking up your money. Consider keeping it liquid and available, in your bank's money market deposit account. Or keep it in your checking account so you can qualify for free checking. You won't be giving up very much in interest, and you'll keep your cash close at hand. That could prove to be convenient if those CD rates ever rise.

[Source: By Linda Stern, Reuters, Washington, 08Nov10]

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