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4 things CDs are still good for

By Claes Bell, CFA · Bankrate.com
Monday, August 22, 2011
Posted: 3 pm ET

It's looking ugly out there for people who depend on CDs as the primary drivers of their portfolios. Ultra-low CD rates have downgraded the usefulness of even laddered CDs as a long-term investment tool; many CD investors are stuck rolling over maturing CDs with decent rates from a few years ago into the record-low rate CDs of today.

But despite low yields, CDs still have their uses. Here are a few roles they can still play in your financial life.

  1. Protecting a windfall -- To prevent a major splurge and keep their new-found cash safe, recipients of windfalls can turn to CDs. CDs can provide a safe-haven, a small but certain return, and a few months or years to consider how best to spend that cash.
  2. Holding cash for a major, scheduled purchase -- Because they have a defined end date and a better return, in some cases, than savings accounts, CDs can be useful for locking away a lump sum payment such as the down payment on a car or house.
  3. Holding retirement cash in the run-up to your retirement date -- If you're lucky enough to have a predetermined retirement date, a CD can be a good way to hold the cash portion of your retirement portfolio and earn a little interest while you're at it. Not only is it immune to the fluctuations of the stock markets, but the fact that it's a timed deposit will help soon-to-be retirees resist spending their nest egg before retirement starts.
  4. Safeguarding the cash portion of an investment portfolio -- If you feel better having a portion of your portfolio in a secure, non-volatile investment to ride out market volatility, you can do a lot worse than a CD. Treasuries have traditionally served this role in many portfolios, but with a global flight to safety driving Treasury yields even lower than CD rates, it might be a good idea to consider CDs instead.

One more thing: If you're looking to get a CD to fill any of these roles, keep in mind that, while the average one-year CD yield is just .42 percent, you can easily find rates over 1 percent on Bankrate's CD rate tables.

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2 Comments
Claes Bell
August 24, 2011 at 11:24 am

Hi Marie. Thanks for reading. Unfortunately, no one knows where CD rates will bottom out. It's possible they could drop even further than their present levels before they go back up again. I've got a story on what's driving those low rates, and what will have to change before CD rates begin rising again: http://www.bankrate.com/finance/investing/what-s-crushing-cd-rates-1.aspx ... hope that helps!

Marie Owens
August 24, 2011 at 11:21 am

When interest rates on C.D's started falling I never dreamed I would ever see the day when they got as low as they are. Where is the stopping point for them to continue to lower the rate & start increasing it?