With CD rates this low, take on some risk in 2013
In 2013, don't look for any relief from record-low CD rates.
Even the best certificates of deposit might not keep up with inflation, and the Federal Reserve has all but guaranteed savers will be stuck with low yields for years to come.
But that doesn't mean there aren't alternatives out there to earn some extra cash. You'll just have to take on a little risk.
Two places to look: dividend-paying stocks and international bond funds.
We'll tell you what you can expect from these investments, but first let's recap the environment for CD rates.
We survey banks throughout the country each week to learn what they pay savers who purchase certificates. In the final 2012 survey, we found average yields ranging from 0.12% APY (3-month CD) to 0.90% APY (60-month CD).
Every term we track set or matched a record low in the final week of 2012.
Of course, these pathetic yields don't come close to keeping up with inflation, which was last pegged at 1.8%.
Some people now jokingly call CDs "certificates of depreciation," an apt description.
The only good news is that rates probably can't get much lower. That's hardly comfort to savers who depend on decent interest rates of between 3% and 5% in order to live.
How Far Have Average CD Rates Fallen?
|Term||Jan. 2010||Dec. 2012||% Change|
|3-months||0.36% APY||0.12% APY||-67%|
|6-months||0.50% APY||0.18% APY||-64%|
|12-months||0.81% APY||0.28% APY||-65%|
|24-months||1.23% APY||0.44% APY||-64%|
|36-months||1.54% APY||0.55% APY||-64%|
|60-months||2.10% APY||0.90% APY||-57%|
No increased rates in 2013
In December, the Federal Reserve announced a new barometer by which it would measure when it's time to increase interest rates: the unemployment rate.
Specifically, the Fed's rate-setting committee said it intends to hold rates down until the unemployment rate falls to at least 6.5%.
Economists debate when unemployment may reach that target, but one thing is for sure: It won't be in 2013.
This means savers are in for at least another year, if not two or three years, of terribly low rates.
Even when the Fed does start tightening its belt, it still could be a long time, perhaps a decade or more, before you can once again earn 5% or more on a CD.
The Fed influences bank interest rates by setting what's called the federal funds rate — what banks pay to borrow money that other banks have on deposit with the Federal Reserve.
Since December 2008, the Federal Open Markets Committee has essentially been loaning money to banks for free in an attempt to spur lending and boost the economy.
But since banks are getting money so cheap these days, they've got little incentive to pay to borrow your money.
Of course, with so much economic uncertainty, it's always wise to keep some of your money in an investment where your principal is safe.
A good place to start your search is our database, where you can find the best CD rates from numerous institutions.
Top Nationally Available CDs
|6-month CDs||Doral Bank Direct||0.90%|
|12-month CDs||CIT Bank||1.05%|
|Colorado Federal Savings||1.05%|
|Sallie Mae Bank||1.05%|
|60-month CDs||CSBdirect||2.05%||Accurate as of Jan. 11, 2013|
Just know that, even with the best of these certificates of deposit, you're still losing money in real terms and spending power.
The Consumer Price Index, a measure of inflation, increased 1.8% between November 2011 and November 2012. You may have scrimped by on the rate to almost break even last year, but then the taxes you paid on the interest means you still likely lost money in real terms.
Your investing power is even worse with shorter-term CDs.
In ordinary times, you'd lock in a higher rate for a longer period in case those rates drop. But with rates already at the bottom, you have to question the point of putting money in a 5-year CD.
You might earn a little bit more than a shorter-term CD, but then you'll have to break the CD and incur a penalty and interest loss if you want to capitalize on higher rates in a couple of years.
You might buy a 5-year CD now at 1.41%, but what if the Fed starts tightening in the end of 2014 and they're then paying 2.3%?
Why take the risk?
This is why it is critical that you look for investment opportunities that can earn more.
Seek out alternatives and take on a little risk
You can find higher yields, but most of these investments involve risking your principal.
Start with a good, safe bet: Series I Savings Bonds.
While the yields change every six months based on inflation, your principal is protected. The U.S. Treasury currently pays 1.76% APY, but it will reset in April 2013.
That rate isn't much better than a CD now, but there's a little more upside since the rate resets twice a year and could rise.
If you want to do even better, you're going to have to take on risk with stocks and bond funds. They are not FDIC-insured, and you can lose money — sometimes a lot of it.
But if you've got the chance to earn 5% when your only "safe" options are paying less than 2%, you just might consider it.
Start by checking out a couple of good dividend-paying stocks.
There are a number of solid companies that pay 3% to 6% annual dividends. A few good choices include Verizon, Coca-Cola and Exxon Mobil.
You can minimize some of the risk and volatility by picking a stock with a beta (a common measurement of how volatile a stock is compared to the overall market) below 1 and by holding the stock for a few years to weather ups and downs.
You can also look to international bond funds, where you can earn 3% to 4% with minimal risk.
These are mutual funds or exchange-traded funds that invest in bonds issued and backed by foreign governments.
Interest rates in those countries are not at record lows as they are in the U.S., so the yields are better.
Foreign bond funds also historically have performed better than U.S. bond funds.
Start by looking at diversified funds that hold bonds from many stable countries like Japan, Germany, the United Kingdom and France.
You can buy bond funds and stocks from any stockbroker, including online brokerages like E*Trade and Scottrade.