CDs Are Looking Better

At a time when Treasury notes are paying miserly interest rates and yields on money market funds aren’t much better, some banks are enticing savers by dangling interest rates as high as 4.25% on a one-year CD. As a result, skittish investors who are taking money out of stocks are finding CDs an attractive alternative that offer safety as well as a decent return.

Banks like CDs, too, because they know that the cash that savers put into CDs will stay around for a while and not fly out the door in a few days or weeks.

Unlike volatile stocks, safety is generally not an issue with a CD. As long as the CD deposit is covered by the FDIC and is under the FDIC limit of $100,000, the cash is disaster-proof. One concern, however, is whether CD yields will keep pace with inflation, which has been on the rise in recent months. The best protection, say financial advisors, is to stick to short-term CDs.

A good CD investment strategy is “laddering,” which involves splitting your money among several CDs of varying maturities. For example, if you have $10,000 to invest, you put $2,500 each into four separate CDs maturing in six months, 12 months, 18 months, and 2 years. When the first CD matures, you reinvest the cash in a 2-year CD. Eventually, you will have four 2-year CDs earning attractive interest rates, but you will never have to wait longer than 6 months to cash one in if you need to.

For a look at the best recent CD rates and more on laddering, go to Bankrate.com.