In this era of ultra-low savings rates, it's difficult to see the allure of CDs. Luckily, today's interest rate environment is not the norm.
The Federal Reserve Bank of New York lists changes to the federal funds rate since 1971. Until December 2008 short-term interest rates had never dipped below 1 percent.
Short-term interest rates have a direct effect on CD rates and when higher interest rates prevail, savers can earn enough interest to live off of CDs and other very safe savings vehicles.
Safety is the key to the appeal of CDs. With zero risk to principal, savers can sit back and let their money earn interest without stock market anxiety.
There are a couple of caveats:
- CDs must be held to maturity to avoid an early withdrawal penalty. Depending on the terms, if the CD hasn't been held long enough for the interest earned to satisfy the penalty, the bank may dip into principal.
- In order to protect against a bank failure, the CD has to be issued by an institution insured by the Federal Deposit Insurance Corp., or the credit union equivalent, the National Credit Union Administration. The FDIC and the NCUA insure deposits of up to $250,000.
CDs are also extremely convenient; they can be purchased at nearly any bank or even in a brokerage account.
Unfortunately the major benefit of CDs, safe and reliable interest income, has been negated by prolonged low interest rates. But that could be changing.
With increasing inflation expectations, 2011 could be the last time savers are afflicted with such depressingly low CD rates.
There are some good deals out there. Use Bankrate's rate tables to find the best CD rates available.