With the stock market swinging up and down as the economies in the United States and Europe appear to be heading back towards a recession, it could be a good idea to move your savings out of the stock market and into safer asset classes. However, the Federal Reserve has stated that it plans to keep interest rates as low as possible for the foreseeable future, and has taken steps to drive interest rates even lower than the current record lows by swapping longer term debt for short term debt. Because of this, interest rates on savings accounts are hovering around 0%, making them a poor choice with inflation rates over 3%. Bonds are the other common alternative, but they are also seeing their rates driven down by the actions of the Federal Reserve, and they are affected by many of the same economic risks as stocks.
Since the stock and bond markets appear to be too risky at this time, and savings accounts paying near 0%, one alternative that allows savers to avoid risk and obtain a higher return on their savings is certificates of deposit, or CDs. According to the SEC, CDs are protected by the same insurance as savings accounts (currently $250,000), yet offer a higher yield than savings accounts, making them an attractive investment. However, savers are generally required to keep their deposit locked up in the CD for a fixed amount of time that can range from six months to 10 years, so it is important to ensure that the principal invested in the CD will not be needed until the CD matures, or a penalty could be imposed for early withdrawal. Other considerations to keep in mind are whether the CD offers a fixed rate, whether it can be called early by the bank, how often the earned interest is paid, and if a CD is offered by a broker instead of a bank, the reliability of the broker must be investigated, since they act as an intermediary between the saver and the bank where the funds will be stored.
Almost every bank offers CDs of some kind, and most banks will sell CDs to investors without requiring them to open a savings or checking account at the bank, so there are plenty of options available to people looking for a safe place to put some savings. I suggest researching the options online to see which CD is best for you, but when I checked today, Discover Bank offered rates that were well above the national average, along with easy funding options and reasonable early withdrawal fees. If you have some spare cash sitting around in a savings or checking account that is earning little to no interest and you know you won’t need it for some time, a CD could be a good investment choice.