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Picking CDs based on emotions?

By Sheyna Steiner · Bankrate.com
Wednesday, May 21, 2014
Posted: 2 pm ET

Research in the science of human behavior points to the fact that humans make decisions based on emotions and intuition rather than logic and analysis.

On a dollars-and-cents level, making decisions based on gut instinct can sometimes work against you. For instance, between December 2007 and December 2013, consumers increased their liquid account balances by 89 percent, according to a story by Dan Geller on TheFinancialBrand.com. Liquid accounts include savings and money market accounts, and they earned an average yearly return of 0.62 percent, the website reports.

Over the same time period, term deposits -- certificates of deposit, for instance -- decreased by 37 percent, though they returned an average rate of 1.39 percent.

From the story "Behavioral pricing -- Watch your competitors, but price for consumers:"

"Making an analytical financial decision to leave $10,000 in an average-term certificate of deposit account would have yielded consumers $139 per year for each of the past six years compared to an actual return of only $62, resulting from an intuitive financial decision to shift the money to a liquid account."

Basically, savers did what felt right by keeping cash easily accessible. In the long run though, what feels comfortable and right may not make financial sense.

CD rates have withered since the Federal Reserve dropped short-term interest rates close to zero in December 2008. Rates on money market accounts have suffered as well.

Average CD and money market account rates

MMA yield 1-year CD yield 5-year CD yield
2008 0.72% 2.39% 3.22%
2009 0.39% 1.16% 2.23%
2010 0.21% 0.65% 1.9%
2011 0.16% 0.43% 1.5%
2012 0.12% 0.32% 1.06%
2013 0.11% 0.24% 0.8%

Source: Bankrate.com

Use Bankrate's CD rate calculator to see if a CD makes sense for you.

Would you rather earn the return offered by CDs or have the liquidity of a savings account for the bulk of your short-term savings?

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Follow me on Twitter: @SheynaSteiner.

***
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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