Meanwhile, the rate of inflation is running at around 2 percent, which means that in real terms you lose money every minute that you own a certificate of deposit.
Yet, as the Journal learned when it stopped publishing CD rates in Monday's Business Outlook a few weeks ago, CDs are still an essential part of some investors' portfolios. We received dozens of phone calls and emails from investors saying their cash management strategies depend on CDs. We resumed publishing the rates last Monday.
Among the investors we heard from was
The appeal of CDs, she said, is their safety and their simplicity.
"For my age, I don't want to go into something risky," she said.
Waters was invested in the stock market until about 10 years ago, but market declines moved her away from equities.
"I don't pay attention," she said. "I didn't notice when the market started going down so fast. My broker didn't even so much as ring my telephone."
On the other hand, she can track CDs herself.
"I love that every single Monday, I would go to Business Outlook and check and see if anything has moved. Even a tiny change (in interest rates) makes a difference."
Certificates of deposit are offered by banks, credit unions and thrift institutions. They typically offer a higher rate of interest than a regular savings account. CDs are insured by the
Financial institutions require that you purchase the CD for a fixed period of time, perhaps a few months, perhaps several years. The principal is returned at the end of that term.
The periodic interest payments you earn are taxable unless the CD is held in an individual retirement account or other tax-advantaged account. Most institutions charge a penalty if you withdraw the funds before the CD term has expired.
"I would not be recommending CDs if there was a really viable option," Waters said. "I don't know of a good place to put money these days that will make any sort of appreciable interest."
Low interest rates have made all savings instruments less lucrative. Passbook savings accounts pay 0.03 percent. Even a 10-year Treasury pays only a little better than 2.5 percent.
"Retirees need at least a year of liquid funds," he said.
The problem is where to park the money?
"It's a tough one, it really is," he said.
"With new clients coming in, I rarely see a CD in their portfolio, although I do see clients coming in with tons of cash. They are still shell-shocked from the Great Recession."
Maydeski advises that if you must buy a CD, keep the term short.
"If you're locking up money for 1.5 percent for five years and rates take off, you look a little silly," he said.
It is possible to shop around, too. Maydeski has found Internet banks that pay 2 percent on five-year CDs, for example. Money-market accounts might pay better than short-term CDs, but keep in mind that they are not insured and that the rate you earn is not fixed, he said.
As a share of commercial bank deposits, CDs barely register these days. According to the Federal Reserve Bank of
Savings deposits, on the other hand, total
Small-time deposits surged to more than
"People are keeping a lot of money in checking accounts, whether they are interest-bearing or not, because rates are so low," said U.S. Bank Community Relations Executive
Some investors find that tying funds up in a time deposit just doesn't pay enough to sacrifice the convenience and liquidity of a checking account, he said.
Even so, many
"In general, people are investing in CDs in large part because they like the
There is no typical CD customer, Dee said.
"They run the gamut from very young to very old. As people get older, especially if they are in their retirement years, they more proactively manage their CD balances" by shopping for rates and moving funds among institutions in search of the best return, he said.
Dee said younger investors and commercial customers tend to roll expiring CDs over at the same term in the same credit union, bank or thrift.
"A lot of business entities have been standing on the sidelines waiting for the economy to break loose," he said. "They are sitting with large amounts of cash. Some of it is in money market accounts. Some is in CDs, if they know they can park it there for a while and get a better rate."
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