How to earn top dollar on your CDs

Hands holding fanned-out money

Make the most of your savings by following three simple investment strategies when buying certificates of deposit.

Strategy 1. Go short.

For months now, the best rates have been on short-term CDs.

Although rates have fallen a little over the past few months, you can still find 6-month and 1-year CDs offering a yield of 5.2% or better and dozens of them with yields above 5% -- that's the annual rate of return including interest on the interest you earn.

If two- or three-year CDs were paying significantly more than short-term CDs, we'd urge you to buy longer-term CDs.

But that's not the case.

Citibank, for example, continues to offer its best rate on a six-month CD -- 5%. That's far more than the 4.2% it's offering for a one-year CD or the 4% you get for two-, three- and four-year CDs. Next in line is the nine-month CD, which is paying 4.5%.

If there were compelling evidence that rates would substantially decline over the next six months, we would suggest committing at least some of your money to longer-term CDs.

But that's not the case, either.

For two years, from June 2004 through June 2006, the Federal Reserve Bank pushed interest rates steadily higher in an attempt to reduce the inflation rate.

But since August the Fed's rate-setting committee has left rates unchanged, declaring that the economy was slowing enough to keep the price of everything from computers to manicures in check.

The Fed gave no indication that it would resume raising rates anytime soon or that it would begin lowering them either.

So while rates should remain about where they are well into the summer and maybe beyond, it's impossible to predict with any confidence how long they'll remain relatively stable, or whether they'll go higher or lower when they do change.

That's why we think the best strategy is to accept the uncertainty we're facing and take advantage of the best short-term rates you can find in our CD rate comparison charts.

Strategy 2. Be flexible.

To make the most of your savings you must be willing to move your money to a bank down the street, across town or on the other side of the country.

Right now, the best rates are consistently coming from two places: online banks and special promotions at small to mid-size banks.

Online banks are just like any other banks except they don't have branch offices. All transactions are done electronically using your computer or an ATM machine, the phone or the good old U.S. mail.

But they're new, and like anything new, online banks have to offer better rates to get noticed and persuade consumers to try them out. That's why you'll find online banks offering most of the top rates on our comparison charts.

Signing up is easier than you might think and your deposits are insured by the federal government, just like they are at most other banks.

If you've never worked with an online bank, our guide to getting started with online banks will answer many of your questions and show you to how to open an account.

Traditional banks, particularly small and medium-sized banks, are desperate for deposits.

They depend on your money to fund the great majority of their loans. But since 1990, loans have grown faster than deposits at the nation's 8,700 federally-insured banks and thrifts.

As a result, the percentage of bank loans funded by deposits has reached an all-time low.

To lure new deposits through their doors, most banks are using heavily promoted specials that pay exceptionally high rates on one or two types of CDs. It's not uncommon for these specials to be a full two points higher than what the bank is offering on its traditional CDs.

What all this means is that you have to be willing to move your money to the best online bank or special offer you can find every time one of your CDs matures. You can't sit back and let a bank roll your money over into a new CD that's not earning top dollar.

Let's say you have $5,000 to invest. You'll make $88 on a six-month CD that pays a very average rate of 3.5%. You'll make $134 on the same CD paying a top yield of 5.3%.

Can you afford to throw that $56 away?

Strategy 3. Go odd.

Many of the best specials are for odd-term CDs that mature in five, seven, 11 or 13 months.

Banks do that so that existing customers won't be offered the higher rate when they're asked to renew a standard six- or 12-month CD. Sometimes the fine print on special offers even says, "New deposits only."

But we've never heard of a bank refusing to let existing customers take advantage of a special offer. You just have to ask.

You can find odd-term specials by doing an Internet search for terms like "7-month CDs," checking newspaper ads, window banners and bank Web sites. Pay particular attention to separate listings for specials or links to "Special Offers."

Last summer the bigger banks seemed to have the best specials. This spring it's the smaller banks that are catching our eye with offers like these:

That's why you should never commit your money to a six-month or one-year CD without asking the bank if it has a better rate on an odd-term CD.