Savings Accounts and CDs
Artificially low interest rates are great when it comes time to purchase or refinance a home, but Federal Reserve policy is penalizing older Americans at the exact time when they are shifting to income producing investments like savings accounts.
This week, I read several thoughtful reviews of interest rates for savings accounts and CDs. As one example, this article at Wise Bread looked at one and five year rates across CDs from six well know institutions. The article states “Below are five great high yield CDs to consider,” with the best one year rate at 1.00% and the best five year rate at 1.80%.
But seriously, is tying up your money for five years at 1.80% a great option? Is it really worth the time and effort to switch savings accounts for a rate difference of 0.1%? Yes, you will need to keep some money in a low or no-yield account, but that’s a great use for a checking account. And by the way, some of those pay interest as well.
Lastly, be careful that in your quest to find a higher rate, you don’t shift money into investments that carry a high risk. Putting money into dividend producing stocks, mutual funds, bonds, or bond funds may seem smart based on historical returns, but with these investments you could lose some or all of your principal.
A Possible Alternative
If you want to use that extra cash in a more meaningful way, consider using it to pay down your debt, especially if that debt has a high interest rate, a credit card for example. And as you eliminate debt, you will be able to better manage your expenses. In addition, you may also improve your credit score which will reduce your borrowing costs in the future.
photo credit: Andres Rueda