Our friends at The Fed, led by Alan Greenspan and now Ben Bernanke, have hiked interest rates 17 times in a row recently. We may not have been paying much attention while this happened, but it has some significant implications for you and me.
The near-record-low interest rates of the past few years have been big boons for borrowers, such as home buyers. But for savers, it's been a grim period. Bank accounts were routinely paying 1% or much less in interest -- ouch. CD rates, as well, were rather low. This caused many of us to stop paying attention to the rates and to exclude such options from our consideration. But things have changed.
Here are some top recent CD rates (expressed as annual percentage yields), per Bankrate.com
- 3 month: 5.40%
- 6 month: 5.60%
- 9 month: 5.60%
- 1 year: 5.67%
- 18 months: 5.69%
- 2 years: 5.75%
- 3 years: 5.65%
- 5 years: 5.66%
Pretty attractive, no? They're comparable to what you'd earn on many bonds, and they're likely to outperform or compete with many stocks, too. Over roughly the last two years, for example, Cisco Systems
Here are some things to keep in mind:
- CDs are excellent places to sock away your short-term money, such as money you might need in an emergency (as long as you're not locking up the money for too long). (Learn more about managing your emergency fund -- a critical topic ignored by too many.)
- Don't just go for the highest rate you can find. Consider the time frame, too. If you're pretty sure rates will be rising, then why lock yourself into a 5-year CD? (Perhaps hedge your bets by putting some money in a 5-year CD, some in a 2-year CD, and some in a 1-year CD ... that's called laddering.) If you think rates will be falling, look harder at long-term CDs.
- If you're not sure where interest rates are headed, or you're not sure what to do with your money, consider at least parking it in something like a short-term CD, where it can earn interest until you decide what else to do with it.
- Remember that you can invest in CDs via all kinds of financial institutions, not just your local bank branch. If you find a good rate at a respectable, FDIC-insured Florida bank, you can invest there. Just don't sign up with Louie and Thelma's Savings Bank.
- That said, do shop around locally, as you can sometimes find great deals that way. Check with your local credit unions, too.
- If a rate you see seems too good to be true, it probably is. Perhaps check to make sure the rate you see is comparable to ones listed at Bankrate.com. If it isn't, skip it.
Another option for short-term money is a money market account, which offers the benefit of being able to withdraw your money 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 when and invest accordingly.
Don't leave your important short-term money's performance up to chance. To take savings matters into your own hands and to learn how to allocate your money sensibly, visit our Savings Center.
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