The Interest Rate Conundrum
Lower interest rates are a boon to borrowers, but savers are feeling some pain as the Federal Reserve has cut interest rates to multi-year lows to try to jump-start the economy. Interest rates on certificates of deposit (CDs) and bank savings and money market accounts are now so low
“Industry, perseverance, and frugality make fortune yield.”—Benjamin Franklin
Lower interest rates are a boon to borrowers, but savers are feeling some pain as the Federal Reserve has cut interest rates to multi-year lows to try to jump-start the economy. Interest rates on certificates of deposit (CDs) and bank savings and money market accounts are now so low that they often don’t keep up with the inflation rate.
According to Bankrate.com, money market mutual funds now have yields ranging from 1.08% to 2.61% and yields on money market accounts at brick-and-mortar banks are even worse, with many banks paying less than 1% on these accounts. CD rates aren’t much better, with the average interest rate on a one-year CD hovering just over 3%.
One strategy for squeezing some extra yield from your savings is CD laddering. Take the total amount of your savings and divide it into four or five equal batches. Invest each batch into CDs with graduated maturities—6-month, 1-year, 18-month, and 2-year, for example. When the first CD matures, reinvest it in a 2-year CD. At the end of the cycle, you’ll have four 2-year CDs earning higher interest and, at the same time, you’ll never be more than 6 months away from being able to cash in a CD if you need to.
If you’re looking for better rates on any savings investment, online banks like ING Direct and EmigrantDirect may be answer. Visit Bankrate.com to compare interest rates for both online banks and traditional brick-and-mortar banks in your area.
3.9%—Current US inflation rate.(InflationData.com, 2008)
Read More:
• Savers: Are Better Yields Ahead?
• Callable CDs May Not Serve Savers
