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Certificates of Deposit (CDs)
and High-Yield Savings Accounts

Difference Between A Certificate of Deposit (CD) and A High-Yield Savings Account?

High-yield savings accounts are just like a typical savings accounts, except the annual percentage yields (APY) are typically higher than those associated with standard savings accounts.

CD's also offer higher yields than standard savings accounts.

With a CD, you agree to let a bank invest a specific amount of your money however they wish, for a specific amount of time. And here's the catch: you also agree that you won't withdraw any part of your CD during the CD's term. So if you invest in a 12 month CD with an APY of 3%, you'd be smacked with a hefty penalty if you tried to withdraw any amount before the CD matures.

Many CD's require a minimum deposit, but not all.

Some banks offer exotic CD products. You may have heard of "Raise Your Rate" or "No Penalty" CD's. Be sure to read all the fine print before signing up for any CD. Mixing money with ignorance is an excellent way to set yourself up for a financial disaster.

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits, including CD's, up to $250,000, just in case your bank goes under. Bank failures are quite common, especially when the economy is not doing well. So, before you invest, make sure the financial institution your dealing with is FDIC-insured.

CD's are considered relatively safe and provide a decent return on your investment. Before investing in a CD, use your favorite search engines (don't rely on Google alone! Yahoo! and Bing are great search engines too!) to research the financial institution you plan on using. If you find complaints about fraudulent activity or poor customer service or worse, then stay far away from that particular financial institution. The last thing you want is to have your money tied up in CD's provided by a fraudulent company like Stanford Financial.

Credit unions have weathered the 2008 financial crisis and Great Recession quite well. If you can join one, it's a great idea to buy a CD with a credit union (a CD at a credit union is called a share certificate.)

When Will Online Savings Account And Certificate of Deposit (CD) Rates Go Up?
Many Americans have been frustrated by the low yields associated with online savings accounts and certificates of deposit (CD's). The reasons for the low rates are clear. What's not so clear is when rates will rise to levels that once again reward responsible savers for being smart with their money.
For many money-savvy Americans, the current interest-rate environment is very frustrating. Imagine spending years being frugal and responsible with your money, spending as little as you can and saving as much as you can, only to be rewarded with a savings account rate of 1.25%. Very frustrating indeed. Even online savings accounts, which typically offer better yields than traditional savings accounts, are offering less than 2%.

The situation with Certificates of Deposit (CD's) is no better.

The reason for the lousy rates is quite simple: the Federal Reserve is currently letting banks borrow at no more than 0.25%. So, if a bank can borrow at 0.25% -- which is the current fed funds target rate -- why would it borrow money from you at 5% via a savings account or a CD? That's the gist of it. This is why CD and savings-account rates rise as fall in tandem with the target fed funds rate, the Fed's most important monetary policy tool.

So the big question is: when will savings rates start to rise?

The answer, unfortunately, is not any time soon. Any experienced rate watcher will tell you that the Fed is going to keep the benchmark fed funds target rate at 0%-0.25% for the rest of the year, and probably well into 2011. The fed funds futures market, a very good predictor of where interest rates are headed, is currently 100% certain that the Fed will keep short-term rates at record low levels for the rest of 2010.

Who's to blame? Why, the Great Recession, of course. The Fed can't raise rates while unemployment is high, economic growth is weak and the very real threat of deflation persists. Moreover, many seasoned economists believe that the very recent Great Recession will soon become the Great Double-Dip Recession.

The Fed is just as frustrated as the unnumbered folks around the country trying to find stronger yields for their hard-earned savings. The Federal Reserve is currently dealing with what's called a liquidity trap. It has lowered rates as much as it can, and has pumped massive amounts of new cash into the economy. Despite these actions, the economy is still not expanding in a sustainable way. That's the trap. It's the same trap that has kept Japanese central bankers scratching their heads in frustration since the 1990's.

And if you think you might do better with US Treasury securities, think again. The Fed has been pumping many billions into Treasury securities, thus driving the yields associated with these super-safe investments down. This not only keeps mortgage rates low, which is good for the languishing housing market, but it also makes Treasuries less appealing to investors. To help bolster the anemic US economy, the Fed would much rather prod Wall Street to put its money into riskier investments like stocks and corporate securities, which aren't as safe as Treasuries but do offer higher yields. The Fed wants your 401K to look like it did back in 2006, which would certainly help to make you and millions of other Americans feels prosperous again.

So what is the responsible saver to do?

The best course of action a money-savvy American can take is to simply continue to scan the Internet for the best available rates on CD's and online savings accounts. Definitely not a good idea to lock up a significant amount of cash for 3 or 5 years. Best to stick with 6 to 12 month CD's while yields are low. There are lots of easy-to-find blogs out there that report on the latest and greatest rates from around the country.

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