Editor's note: Not drowning in debt? Have $1,000 to put to work? TheStreet.com senior correspondent and You're So Money author Farnoosh Torabi looks at certificates of deposit (CDs).
With all the eye-rolling over how there's no point in putting money in a short-term savings vehicle -- with the
slashing interest rates and all -- I wonder how my 12-month "Orange" CD from INGdirect.com
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
of my money is pad-locked safe in an interest-bearing account
-- up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).
CD Rates Make a Comeback
var config = new Array(); config<BRACKET>"videoId"</BRACKET> = 1546256358; config<BRACKET>"playerTag"</BRACKET> = "TSCM Embedded Video Player"; config<BRACKET>"autoStart"</BRACKET> = false; config<BRACKET>"preloadBackColor"</BRACKET> = "#FFFFFF"; config<BRACKET>"useOverlayMenu"</BRACKET> = "false"; config<BRACKET>"width"</BRACKET> = 265; config<BRACKET>"height"</BRACKET> = 255; config<BRACKET>"playerId"</BRACKET> = 1243645856; createExperience(config, 8);
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 --
Research In Motion
-- are all trading in triple digits.
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
, as well as local credit unions and
, 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.
can help you search for a credit union.
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
. 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
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
To hear more from Torabi, check out "Open Book: How to Be 'So Money'" on
Plus, to research CDs and other bank products, visit BankingMyWay.com.
Farnoosh Torabi joined TheStreet.com TV in July 2006 as the site's first official video correspondent. Previously, Farnoosh was a business producer and on-air reporter for NY1 News, Time Warner's 24-hour news channel in New York City. Farnoosh is a regular columnist for AM New York and has written for Money, Time, New York Daily News and Newsday. Farnoosh is a graduate of Pennsylvania State University, with a degree in Finance and International Business and holds a M.A. from the Columbia School of Journalism.