CDs Are Coming Back in Style


With the Federal Reserve continuing to raise interest rates, some investors are taking a new look at certificates of deposit (CDs). CDs are time deposits issued by banks and thrifts across the country that are insured up to $100,000 per depositor through the Federal Deposit Insurance Corporation (FDIC).

CDs fell out of favor with many investors when interest rates hit rock bottom, but now, after the Federal Reserve’s series of interest-rate hikes since mid-2004, short-term rates hover around 4.5%, and many investors are once again turning to CDs. According to MSNBC, the amount of money invested in traditional CDs now exceeds $1 trillion — an 18% increase over last year and a 27% gain since the Fed started to raise rates nearly two years ago.

Most CDs offer a fixed rate of interest, a specified maturity date, a low minimum deposit of $1,000 and an “estate put” feature which makes the CDs redeemable at par upon death of the holder. CDs with short maturities (less than one year) generally pay interest at maturity, while longer-term maturities usually pay interest semi-annually.

In exchange for locking up your cash for a set term, CDs guarantee a yield that’s usually higher than money fund rates. While the top-paying money fund currently yields 4.58%, investors can easily find six-month CDs at 4.6% or more.

The key is to know what time frame you’re willing to commit to. Currently, the best five-year CD yields as little as 0.34 percentage points more than the best six-month CDs. Penalties for cashing out before maturity are steep (usually three to six months’ interest). So investors need to consider how long they want to tie up their cash, and whether or not the higher interest of a longer-term CD will be worth it for them.

If you have a few different savings accounts and some scattered CDs, consider moving these accounts to one bank. You may be able to qualify for discounts on loan rates or avoid fees some banks charge if minimums aren’t met.

Additionally, you don’t necessarily have to stick with your existing bank. It’s all about the interest. Think about going out of state if you can find a better return than what you’re finding locally. The increased excitement about CDs these days has banks battling each other to offer more attractive yields, so it makes sense to shop around for the best deal.

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Lee Eisinberg is a Managing Partner with ABLE Financial Group in Scottsdale, Arizona. For more information, please call Eisinberg at (480) 258-6098. Investment products and services are offered through Wachovia Securities Financial Network, LLC (WSFN), member FINRA and SIPC, a registered broker-dealer and separate non-bank affiliate of Wachovia Corporation ABLE Financial Group is a separate entity from WSFN. © 2008 Wachovia Securities Financial Network, LLC.

Money Talks is a regular department in Agency Sales magazine. This column features articles from a variety of financial professionals and is intended to showcase their individual opinions only. The contents of this column should not be construed as investment advice; the opinions expressed herein are not the opinions of MANA, its management, or its directors.