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Are CDs best for short-term saving?

By Sheyna Steiner ·
Friday, January 10, 2014
Posted: 1 pm ET

Scrupulous savers like to squeeze every penny for all its worth. That includes putting money in a parking place that pays. Unfortunately in today's low-interest world, finding a decent return on short-term savings can be a bit of a runaround. Certificates of deposit are a popular choice for savings, but locking money up doesn't always pay off.

There are decent CD rates to be had. Signing up for a five-year maturity can buy enough yield to fight the impact of inflation.

"I see five-year rates around 2 percent and many competitive banks are offering step-ups. That is the ability to step up one time during the maturity if rates go up," says Jeff Currie, president and founder of Currie Financial Group in Boise, Idaho.

The ability to increase a CD rate if the Federal Reserve raises short-term interest rates could help someone commit to a longer-term CD, thus securing a higher yield.

Brokered CDs could be an option for yield seekers as well, says Peter Lazaroff, CFA, CFP, portfolio manager at Acropolis Investment Management in St. Louis.

"Brokerage CDs are trading at historically good valuations," he says. The catch is that to get out of a brokered CD, owners must sell it on the secondary market rather than simply breaking the contract with the bank and paying a fee as they would with a bank CD.

The secondary market is where investors purchase securities or assets from other investors rather than from issuing companies themselves.

Typically "with the brokerage CD, you sell the CD at a loss. The yields are attractive, but there are considerations if they need liquidity," Lazaroff says.

Instead of committing to a CD, he recommends online savings accounts.

"You can earn 75 basis points and have liquidity, and we think they are far superior," Lazaroff says. "You're not getting that much of a bump for locking up your money for a couple years."

A basis point is one-hundredth of 1 percent.

When in doubt, pay off debt

For consumers with credit card debt hanging over them like a dark cloud, paying it off could be a better use of savings than collecting measly returns in a CD or savings account. But it depends on the situation.

"If one can't get anything on CDs, debt repayment is a good option -- if one has enough short-term savings anyway," Currie says.

What do you think? Pay off debt or buy a CD?

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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