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How to Play $1K: Sweet CDs

Farnoosh Torabi

With all the eye-rolling over how there's no point in putting money in a short-term savings vehicle -- with the Fed slashing interest rates and all -- I wonder how my 12-month "Orange" CD from INGdirect.com (ING Quote) is earning an impressive 4.7%.

Granted, I opened the account back in January, when rates were a tad higher. But what if I were to open a new CD at ING now?

Relative to some other bank CD offerings, it would carry a still-competitive yield of 3.3%. The current nationwide average rate of return of CDs is 3.03%, according to Bankrate. And average minimum deposits are about $1,000. Perfect!

Sure, 3.3% is far from the yield one might get from a high-flying stock or other more aggressive investment. But a CD offers more security and a fixed rate of return.

Stability in Volatile Times

I guess I've been feeling a bit conservative lately. But with so much volatility in the financial markets these days, it's nice to know that at least some of my money is pad-locked safe in an interest-bearing account and insured -- up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).

"[A CD] gives consumers peace of mind during uncertain economic times," says Tracey Mills of the Consumer Bankers Association. Plus, with just $1,000, what stocks could I really afford to buy where I'd have enough diversification? The names I like right now -- Apple (AAPL Quote), Research In Motion (RIMM Quote) and First Solar (FSLR Quote) -- are all trading in triple digits.

Rising Yields

CDs have definitely lost some luster with falling interest rates. But that's no reason to shrug off CDs completely. Banks, for one, certainly have not given up on these savings vehicles.

Amid competition for clientele and a stormy credit market, big-box financial institutions, from Bank of America (BAC Quote) to Wachovia (WB Quote), as well as local credit unions and cyber banks, are upping their yields on short and long-term CDs to lure in depositors. After all, "most banks still fund themselves out of their deposits. That's what they use to generate loans," says Keith Leggett, a senior economist with the American Bankers Association.

Not to mention, with the inflation scare, banks are trying to meet consumers' anticipated savings needs. "Inflationary expectations will cause interest rates to rise," says Leggett. "Savers...are going to demand a higher interest rate to compensate them for this risk."

Two Starting Points

Credit unions tend to offer higher yields, since they do little marketing and don't depend on huge spreads to please shareholders.

Experts say they have a history of better savings rates than traditional banks. "A very conservative difference [between a credit union and a bank] would be half to three quarters of a point [more on CD yields]," says Daniel Penrod, industry analyst for the California Credit Union League.

Websites like findacreditunion.com and creditunion.coop can help you search for a credit union. TheStreet.com's BankingMyWay.com is another useful source of credit union information and CD rates.

Credit union CD rate highlights: Meriwest Credit Union in San Jose, California is offering a 12-month CD at 7.50% (minimum deposit: $1,000, "local funds" only) and Alabama-based UmbrellaBank.com is offering a 6-month CD at 3.30% (minimum deposit: $1,000) .

The biggest myth about credit unions is that few can qualify unless they have a certain job, ethnicity or location. But the fact is, most of the population is eligible for one credit union or another. "Plus, with shared branching...you're not limited to your local ATM," says Penrod. The nationwide credit union co-op network includes 25,000 branches.

Next, consider online banks, which can pass on their savings from little overhead to consumers in the form of better interest rates. At ING CD deposits rose by 25% in the first quarter of 2008 compared to the year-ago period. The number of new CD accounts also jumped by 21%. "ING has no brick and mortar branches. It's a high overhead savings that we enjoy passing back to the customers," says Cathy MacFarlane, head of corporate relations for ING DIRECT USA.

Haggle and 'Ladder'

Don't limit your search for a smart CD account to online banks and credit unions. Remember that traditional banks are currently in dire need of liquidity and simply asking for a better rate can sometimes do the trick. "A lot of times banks will have an advertised rate, but that's not their best rate. You can negotiate...make a counter offer," says Leggett, especially if you're an existing customer in good standing or a potential new customer.

Finally, consider "laddering" your CD investments, whereby you place your money in different CDs with various maturity structures. This can maximize your CD rates, as reported earlier by TheStreet.com's Lauren Tara LaCapra. How? When the CD with the shortest maturity expires, have it roll over into the CD with a longer maturity (and likely, a higher yield).

Legget suggests laddering in thirds over a 6-month, 12-month and 18-month CD.

Ways to Play $1K

So what would you do with a cool grand?

From investment and savings vehicles to tax-friendly donations, I will explore various opportunities to put a thousand bucks (or less) to smart (and sometimes fun) use.

Please email me your suggestions at Farnoosh.Torabi@thestreet.com.

To hear more from Torabi, check out "Open Book: How to Be 'So Money'" on TheStreet.com. Plus, to research CDs and other bank products, visit BankingMyWay.com.