Certificates of deposit, or CDs, have been used as a safe investment strategy. But now CDs are producing close to the same rate as hiding money in a mattress, leading many consumers to seek alternatives.
The average yield on a one-year CD dropped to .34 percent on Monday from 3.77 percent in May 2007, according to Bankrate.com. Those rates are falling below the rate of inflation.
“CD yields have been in continual decline for nearly five years because of the record low interest rates environment and, more recently, because banks are awash in deposits in a time when loan demand is still quite weak,” Greg McBride, senior financial analyst for Bankrate, said.
The Federal Reserve has cut interest rates to encourage borrowing and lending and discourage saving in an effort to repair the economy.
Higher interest rates and increased loan demand are the two factors in raising returns on CDs, which will only improve with the economy, McBride said.
But that isn’t likely to change soon.
“The Federal Reserve will likely keep interest rates to near zero levels until late 2014,” McBride said.
Along with the low rates, early withdrawal penalties on CDs are scaring consumers to other investment methods.
Three months of interest is the typical penalty of an early withdrawal on CDs that have a maturity of less than a year, while accounts with one year or more come with a six-month interest fee.
“When you factor in that CDs have early withdrawal penalties, there’s just not enough additional yield to warrant investing in a CD that may be ill-suited to your time horizon,” McBride said.
Bankrate.com provides a list of money market and savings accounts that have interest rates that are near 1 percent. The site also shows the minimum balance necessary to avoid fees and how much is required to open the particular account.
The accounts on the list are all FDIC insured and have fewer penalties than CDs.
Those who have CDs that hit maturity should assess whether the money is needed at a specific time in the future or a predictable stream of income is needed, McBride said.
“If you don’t need the money right away, then a CD is certainly an option,” McBride said. “If your time horizon is longer, then you can look into other investments that carry more risk but offer the promise of higher returns.”
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