Bank Deals 

Whether you’re a novice saver or seasoned investor, here’s where to find winter’s best CD rates

January 24, 2016
Ever since the Federal Reserve lowered interest rates in 2008 to lessen the blow of the Great Recession, it’s been hard to earn much on your savings.

The Fed finally began raising rates last month. But since banks are slow to react, and more substantial hikes by the Fed will be rolled out slowly over the next several years, better yields are still ahead of us.

So where should you put your hard-earned cash in the meantime?

With the typical savings account paying a pathetic 0.10% APY, it’s definitely worth your time to find higher-paying options, such as certificates of deposit.

Nationally available bank CDs are paying as much as 2.30% APY this winter, while credit unions and community banks are offering local deals that pay nearly 3% APY.

There are also a number of strategies for smart CD investing, like starting out with small, regular investments or choosing a CD that allows you to earn a higher return if rates go up.

Let’s begin with the banks offering the best nationally available deals on three of the most popular CD terms: 1 year, 2 years and 5 years.
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 Bank Deals 

Whether you’re a novice saver or seasoned investor here’s how to make up to 3% on CDs this summer

Interest rates are at record lows, but you’ve got to put your money somewhere.

With most savings accounts paying a pathetic 0.10% APY CDs remain a better paying alternative.

Believe it or not, you can earn as much as 3% on some local deals and up to 2.30% on nationally available certificates of deposit.

There are also some special types of CDs that help savers get started, provide the flexibility to make additional deposits or even benefit from a higher rate during the term of the investment.

Let’s start with where to find the best nationally available deals on three of the most popular terms – 5 years, 2 years and 1 year.
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 Personal Finance 

Can CDs be a good place for your emergency fund?

If your emergency fund is sitting in a savings account that pays virtually nothing you might consider investing those dollars in a certificate of deposit.

CDs are just as safe and you’ll earn a little more interest.

The only caveat is that you’ll have to make sure you don’t get hit with stiff early withdrawal penalties should you need access to those funds before the maturity date.

And let’s face it, you never know when an emergency will pop up and you’ll be relieved you have six months or so worth of expenses socked away.

(How much do you need to have available? Take a look at our plan for setting your emergency fund amount.)

So what CD should you choose?

To make a CD worthwhile, you’ll need one that beats the top nationally available savings rate, which has been stuck at 1.01% APY for more than a year.

To achieve that return you’ll probably need to commit your money to at least a 2-year CD.

Search Bankrate’s regularly updated database of the best CD rates to see how much you can earn.
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Are Certificates of Deposit Obsolete?

A certificate of deposit (CD) is a deposit account that pays you a fixed interest rate over a set period. You can close a CD early and pay a penalty but the bank cannot close it (call it) early, unless it’s a very rare callable CD. CDs are nice because they often represent the highest safe return you can get since those deposits are protected by FDIC insurance.

However, when the difference between a 12-month CD and an online savings account is microscopic, you start to wonder if it’s worth the effort. I took a look at one a major online bank (I won’t say which because I don’t want to update these rates when they change, but they are a “friendly” bank and they have very good rates) and their high yield 12-month CD had a yield of 1.29% APY. Their online savings account offered a yield of 1.09% APY. While a 0.20% APY difference is large in relative terms, it’s tiny in real terms.

0.20% APY on $100 is 20 cents. By locking your savings into a 12 month agreement, you earn an extra 20 cents per $100. I’ll be the first to say that every little bit helps, but 20 cents isn’t going to cut it (this is before you carve out a few cents for taxes!).

It makes me wonder, in this era of high yield savings accounts with rates that rival certificates of deposit, have CDs been made obsolete?


What is a Callable CD?

Calling all CDs!As I was reviewing the CD rates of PNC Bank, after learning of PNC’s $100 checking account promotion, I saw that they offered a 36 and 60 month callable CD on their promotional rates page.

A callable CD is a CD where the bank has the option of closing it after the fixed period. The CD is usually “sold” as a fixed month CD with call protection, so a 60 month CD with 12 months of call protection. In that case you have a 60 month CD that the bank cannot call, or close, within the first twelve months. After the twelve months of call protection expires, the bank can close the CD if it chooses to. You, however, cannot. This shifts interest rate risk onto you, the depositor. If rates go up, you don’t benefit because you’re locked in. If rates go down, the bank can simply call the CD and you have no choice but to close it.

The payoff is in the rate. A callable CD will usually have a higher interest rate than a regular CD because the depositor is bearing the risk. In the case of PNC, the 36 month callable CD had a 2.00% APY yield while the 36 regular CD had a 1.15% APY yield. The difference for the 60 month CDs were even greater, with the callable yielding 3.00% APY and the regular yielding a mere 1.55% APY. By the way, according to our best CD rates, a 5 year CD currently yields at least 3.00% APY so don’t bother with PNC’s callable CD if that rate appeals to you.

(Photo: djbrady)


Ally Bank Offers 2-Year Bump Up CDs

Until today, I don’t believe I’ve ever seen any online bank offer a bump up CD. A bump up CD is a certificate of deposit that gives you the option to increase the current rate of your CD to the published rate, “bumping” it up. If you remember my attempt at being cute with the Certificate of Deposit Zoo, it was the giraffe. 🙂

The biggest risk with long term CDs is inflation risk. If you open a two-year CD at 2% and inflation is 3% a year, you’ve effectively lost 1% of purchasing power on that money each year. While it’s better than being in a checking account earning 0%, thus losing 3% each year, your money is “stuck” unless you want to pay a penalty.

Bump up CDs take away some of that risk because they let you bump up the CD’s interest rate one time. Does that make a bump up CD a sure thing? No, but if you have the choice between two long term CDs with identical interest rates, it’s obvious that the CD with a bump up option is superior.

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Where To Invest $1,000

Every once and a while I get an email from a reader that asks where he or she should invest $1,000.

My answer? An online savings account or a certificate of deposit.

Unfortunately, $1,000 just simply isn’t enough for you to invest in the stock market. It’s certainly not enough for real estate and it’s usually not enough for investing in any asset class.

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Ally Bank’s No Penalty CD Rate Arbitrage

Ally BankIf you look at Ally Bank’s current rates, there appears to be a discrepancy in the way they’ve structured their rates. I tweeted about this last week and it appears the difference in rates has persisted through a recent rate drop, making it doubly curious. Let me explain what I mean.

As of today (June 22, 2009), here are the current rates of several of their products:

  • Traditional 9-month CD: 1.75% APY
  • No-Penalty 9-month CD: 2.15% APY
  • Online Savings Account: 2.00% APY

Two things surprise me:

  1. A traditional CD should never have a lower yield than a no-penalty CD of the same maturity. With a no-penalty CD, you have the right to close the CD before the maturity period without penalty. The bank can’t close it. You should be paying, through a discount on the interest rate, for that flexibility. When the no-penalty CD first debuted, its interest rate was a tenth of a percent lower than the traditional CD’s rate.
  2. The no-penalty 9-month CD with a higher yield than the online savings account represents an opportunity. We’re in a period when rates on savings accounts and CDs are dropping. However, should rates ever make a turn and start rising, being locked into a CD might be bad news. However, with a no-penalty CD, I can close at anytime so the risk is minimal! There is no reason why someone should keep their funds in an online savings account when the same exact bank is offering a no-penalty CD option with a higher interest rate.

This morning I transferred all my funds from my Ally Bank online savings account into the 9-month no-penalty CD to get that extra 0.15% APY. If the two accounts weren’t at the same bank, I wouldn’t have done it because the transfer time would’ve cost me interest. However, anytime someone is willing to give me a $2 bill in return for a $1, I take it. 🙂

Is there something I’m missing?

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