Do you have a bundle of short-term savings and you're not sure where to deploy all of it so you can get the biggest bang for your buck? Low interest rates over the past few years haven't made things easy. But now, rates are on the rise. Homebuyers, mortgage refinancers, and other borrowers may not be thrilled about that, but for savers, it's welcome news, especially if you like certificates of deposit.
Thanks to 10 consecutive interest rate hikes from Alan Greenspan and our other friends at the Fed, CDs are finally offering some relatively attractive rates. As a recent BusinessWeek article asked, "Would you rather lock up your money in a 10-year U.S. Treasury bond yielding 4.2% or stash it in a one-year, insured certificate of deposit with the same interest rate?"
You can seek out attractive CD rates at Bankrate.com and also at our own Savings Center, which features some special CD rates for Fools. Click over to the websites of major financial companies such as Wells Fargo (NYSE:WFC), Capital One (NYSE:COF), E*Trade (NYSE:ET), Washington Mutual (NYSE:WM), Wachovia (NYSE:WB), and Countrywide Financial (NYSE:CFC), and you'll probably find some attractive CD rates there, too.
Note that you don't have to secure your CD from your local bank. If you find a great rate online, you may want to take advantage of it. If you find the best rate coming from a bank in Florida or North Dakota, that shouldn't preclude you from investing. (Just make sure the bank you work with carries FDIC insurance.)
Another thing to keep in mind is to not grab the highest rate you can, regardless of the term. As BusinessWeek noted, "The sweet spot extends to two-year CDs, now yielding an average of 3.35%. But don't bother going out any further on the yield curve. The difference between the yields of two-year and three-year CDs is only 0.17 points. So 'investors should have no reason to go beyond two years in a CD,' says Patrick Ifrah, president of Hutchinson Ifrah Financial Services in Little Rock."
Recent national average rates, per Bankrate.com, were 3.36% on a six-month CD, 3.88% on a one-year CD, and 4.33% on a five-year CD.
On the same day that I got those numbers, our Savings Center was offering 18-month CDs with an annual percentage yield of 4.35% and money market accounts at 3.85%. So it can pay to shop around.
Another option for short-term money is a money market account, which offers the benefit of being able to withdraw your cash easily without locking it up as you do in a CD. But CD rates are usually higher. (Some recent money market rates have been around 3.5%.) So figure out how much you'll need, and when you'll need it, and invest accordingly. Remember that rates may well keep rising for a while, so if you lock yourself into a five-year CD, you may regret it.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
