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The Federal Reserve doesn't do savers any favors when it lowers its target for the federal funds rate, a short-term interest rate benchmark. Fortunately, financial institutions are clamoring for deposits, and that means consumers don't have to settle for low-rate CDs, savings or money market accounts.
The Fed has lopped off 2.25 percent
from the federal funds rate since mid-September, taking it to 3
percent from 5.25 percent.
You could have expected short-term deposit rates to drop accordingly, but they haven't.
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Bang for the buck |
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High-yield CDs
High-yield certificates of deposit have come down a bit since mid-September,
but they're still offering decent rates. For instance, according
to Bankrate survey data, the average yield for a six-month CD was
5.17 percent in mid-September; it now stands at 3.92 percent. The
average one-year yield has gone to 3.95 percent from 5.2 percent,
and the five-year is now 4.3 percent, down from 5.64 percent.
The yields aren't great, especially if you believe
that inflation is running at about 4 percent, but they beat keeping
your cash in a typical bank money market account where the average
yield is 0.83 percent -- or worse, an interest-bearing checking
account, where the average yield is down to 0.27 percent.
Shop for best yields
Don't forget, the yields mentioned above are the averages in the
high-yield maturities. If you're willing to spend some time online
looking for the best of the high yields, you'll find, as of this
writing, 13 banks offering at least 4 percent on five-year CDs.
Seriously consider whether you want to lock up your
money for that long. Many people expect short-term rates to rise
again within a year. There's no reason to buy long-term if you're
looking for returns in the 4 percent range. Bankrate's high-yield
database shows 10 institutions offering 4 percent or better
on one-year CDs. These yields won't put a lot of money in your pocket,
but at least you won't lose ground to inflation.
Be sure to also check the list of CDs offered by just about any
bank. Often there's one that's in a "sweet spot." The
bank wants to steer you to that particular maturity so it pays a
higher interest rate.
For example, here's a list of yields being offered
by Washington Mutual, where, clearly, the seven-month CD offers
the best deal (see table).
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CD yields offered by WaMu on 1/31/08 |
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| 1 to 3 |
1.15% |
| 4 |
2.36% |
| 5 to 6 |
2.36% |
| 7 |
3.85% |
| 8 |
2.36% |
| 9 |
2.36% |
| 10 |
2.36% |
| 11 to 12 |
2.36% |
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If you prefer liquidity, for whatever reason, you
could opt for a high-yield
money market or savings account, where One United Bank in Los
Angeles is, as of this writing, paying 5.2 percent and requiring
only $1,000 to open the account. Approximately 20 other institutions
in that listing are paying 4 percent or more.
Another option is reward
checking. These, essentially, are free checking accounts that
pay a high yield on account balances. The catch is that you have
to fulfill certain requirements each statement cycle, such as using
your debit card 10 times, having your statements delivered electronically
and having one direct deposit or automatic bill payment. That's
probably not too difficult for a lot of people. Two
banks mentioned in the Bankrate story "Reward checking pays high yields" have since dropped their rates by 1 percent, which isn't
bad.
Brick-and-mortar deals
The banking industry is littered with low-rate accounts that rely
on customer inertia to keep money, lots of money, in them year after
year. But most banks, even many of the brick-and-mortars, will pay
a decent yield if they can modify your banking behavior. That usually
amounts to shifting away from traditional, costly, labor-intensive
banking.
Citibank's Ultimate Money Account, for instance, pays
4.25 percent if you open the account online or by phone, pay two
bills online each cycle and open a Citi free checking account. Or
you could opt for the Day-to-Day savings account, which can be opened
at a Citibank financial center and doesn't require any online bill
payment, but pays only 0.7 percent.
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