6 smart moves to buy CDs with interest rates at record lows

Yields sign with arrow pointing up and dollar sign

There’s bad and then there’s historic, all-time bad. Unfortunately, that’s where CD rates are right now.

Nor is there any relief in sight after the Federal Reserve said it plans to hold interest rates down until the unemployment rate falls to 6.5%.

Yet the need for the kind of safe, relatively simple savings option that certificates of deposit have represented for many of us seeking financial security is as strong as ever.

It’s always wise to have part of your savings in an investment where your principal isn’t at risk. Add in the uncertainty surrounding Europe’s financial crisis and the feeble U.S. economic recovery, and that security is even more appealing.

With today’s rock-bottom rates, however, a CD might not be your best bet, and even if it is, the rules of the game have changed.

That's why we've come up with 6 smart moves to help savers make the most of a tough situation.

Smart move 1. Substitute top-paying savings and money market accounts for short-term CDs.

One of the current oddities of the deposit market is that some banks are paying more on savings and money market accounts than you can earn with 3-, 6- or even 12-month CDs.

These federally insured accounts are just as safe as CDs, yet they offer more flexibility. You can usually make a limited number of withdrawals per month without penalty, even writing checks on some accounts.

“You’re not tying your money up,” says Martha Schilling, a certified financial planner with Schilling Group Advisors in Dresher, Pa. “It’s available immediately, if you need it, and you’re keeping your options open.”

Watch our "Tips & Deals" section for updates on the best nationally available savings and money market accounts, and check your newspaper and bank signs for local deals on those kinds of deposits.

You should be able to find a money market account that pays around 1%, making it a good alternative to short-term CDs.

How Far Have Average CD Rates Fallen?

Term Jan. 2010 Jan. 2013 % Change
3-month CDs 0.36% APY 0.12% APY -67%
6-month CDs 0.50% APY 0.17% APY -66%
1-year CDs 0.81% APY 0.27% APY -66%
2-year CDs 1.23% APY 0.43% APY -65%
3-year CDs 1.54% APY 0.53% APY -65%
5-year CDs 2.10% APY 0.87% APY -58%

Smart move 2. Look beyond interest rates.

Let’s be honest, with rates below 2% even for 5-year jumbo CDs, nobody’s making much money on CDs. For many savers, that means convenience should trump return.

Buy your CDs at the corner bank where you have your checking or savings account until the Fed allows interest rates to start going up.

If you prefer banking from home, consider an FDIC-backed online bank. They pay some of the better rates available and often make it easy to track your finances from your laptop or smartphone.

If you’re an optimist, consider investing in a “raise your rate CD,” which allows you take advantage of a turnaround in yields, should such a thing occur during the term of your CD.

Comfort, security and familiarity all have value, and with today’s interest rates, you want to seize value wherever you can.

Smart move 3. Avoid long-term CDs until rates improve.

It can be tempting to grab for a slightly higher interest rate by committing to a 7- or even 10-year CD. But you want to go super long when CD rates are near all-time highs, not all-time lows.

The tumble in long-term CD rates the last six months has made this even truer. The spread between most 1-year and 10-year CDs has shrunk to less than a single percentage point. The difference between many 1- and 5-year CDs is currently less than 0.75%.

With the confused economic signals out there right now, it makes no sense to tie up your savings for years for such a small gain.

Smart move 4. Consider blue-chip, dividend-paying stocks as an alternative.

This is not the place to put your emergency fund, or any other cash reserve that you need to be sure is safe. No matter how “blue chip” a stock might be, it comes with risk.

But there are well-established stocks paying annual dividends of 3% or more — better than you can do in any CD, money market account or other bank savings option right now.

Blue-chip stocks also need to be viewed as a long-term investment.

Over five years, Marc Schindler, a certified financial planner with Pivot Point Advisors in Bellaire, Texas, believes a conservative, well-managed portfolio of dividend-paying stocks should return 8% in combined dividends and capital gains.

“The key is, you have to be willing to accept some volatility,” he says.

If staying ahead of inflation is your priority, and you can tolerate the ups and downs of stock prices in today’s jittery markets, then give blue-chip dividend stocks a look.

Smart move 5. Take full advantage of local credit unions.

You can often find higher deposit rates at credit unions than at banks.

It doesn't make sense to shop around for the best returns without including your local credit unions in that search.

Although membership used to be strictly limited to employees of a certain company or trade, those rules have been changed so more savers can join.

Use CULookup.com for a list of the credit unions you’re eligible to join.

Then check the CD rates on their websites to see if they’re high enough to take the plunge.

Smart move 6. Know when to stop looking.

Moving money between banks that all pay less than 1% on their CDs just isn't worth the hassle. That's especially true if you have $5,000 or less to invest.

Choosing between certificates of deposit that pay 0.25% or 0.40% or even 0.80% is no choice at all.

You'll earn very little no matter where you go, and the difference between what you'll earn in interest is just a few dollars a year.

You can see this for yourself.

Our CD calculator will show you how much — or how little — you stand to make with any given interest rate.

And remember, whatever CD you end up with is better than having your money just sitting around, not earning anything.

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