Lower CD rate is price for flexibility

Don TaylorQuestionDear Dr. Don,
What is your opinion about where to save some inherited money for the next five years or so? I thought about Sallie Mae Bank for their 3 percent CD rates. I am retired and live on disability payments, so I may have a need to draw out interest periodically (although not often).
-- Sergio Savings

AnswerDear Sergio,
Sallie Mae Bank is an FDIC-insured member bank. The rate available on its five-year CD is competitive, as presented by Bankrate on its "National High Yield" page for five-year CDs.

Typically, a CD either pays out its interest on a regular basis to the depositor or the interest stays in the account, earning interest on interest over the CD term. The depositor chooses the approach to receiving interest on the deposit when the account is opened.

It's the compounding of interest that allows you to earn an annual percentage yield higher than the nominal rate on the CD. While some CDs do allow you to occasionally tap the account, it's rare to be able to do it whenever you like. And it's likely you would pay a price for that feature -- namely, receiving a lower yield on the deposit.

An alternative is to keep part of the money in a high-yield savings account or a money market account. This money will meet your liquidity needs, while you put the remainder on deposit in the term CD. You can also shop rates for these accounts on Bankrate using its rate search feature.

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