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Are Short-Term CDs Worthwhile Now?


It's difficult to find short-term CDs with rates over 1.50%. In fact, even a 1.25% APY for a 6-month term is competitive these days. The highest 6-month CD APY currently listed at Bankrate is 1.31% at State Bank of India in New York. I listed a few 6-month CDs with yields ranging from 1.50% to 1.60% in my weekly rate summary. Even with these rates, is there any benefit with choosing these CDs over a high-yield savings account?

For some online banks, it doesn't seem to make much sense to go with the 6-month CD. ING Direct is an example. ING's current Orange Savings Account yield is low at 1.10%, but its 6-month CD yield is even lower at 0.75%. For the CD to be a better investment than the savings account, the savings account yield would have to fall to less than 0.40% in 6 months (The average of 1.10% and 0.40% is 0.75%). The savings account rate may fall, but I can't see it falling that much.

Ally Bank also has a 6-month CD rate that's lower than its savings account rate, but it's not nearly as bad as ING Direct. Currently, the 6-month CD yield is 1.25% APY, and the savings and money market account yield is 1.29% APY. Let's assume the rates continue to fall. If the savings account yield falls to half of its current yield (0.65%) in 6 months, the average 6 months yield would be about 0.97%. So the difference between the assumed savings account yield and the 6-month CD yield over the 6 months would be about 0.28% (1.25% - 0.97%). For a $10,000 deposit for 6 months, the difference in earnings would be about $14 (0.0028*10,000/2).

So with the current rates at Ally and assuming savings account rates continue to fall, the 6-month CD may return $14 more per $10,000 than the savings account. That's not a big enough spread to be worth it in my opinion. How much higher does a short-term CD rate have to be over your savings account rate to be worthwhile for you? Do you ever find short-term CDs worthwhile?

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die hard saver
die hard saver   |     |   Comment #2
This whole mess is making me say to hell with all this daily checking stuff. as dumb A said he's gona leave interest rates low for an "extended" time. It may be till next year before anything becomes "competitive".

I use 3 banks and a CU, and they ALL have worthless rates. Only CD I kept in Wachovia from an old day (66 mo.) is still getting 6% till Oct 2011, so maybe by then things will have changed for savers again. The other CD's I have a worthless rate. But I won't let "uncle ben" force me to spend it all just cause it ain't gettin more interest, even 1% is something. But it sucks!

Shorebreak   |     |   Comment #3
Perhaps the "barbelled" strategy instead of laddering CDs would be more appropriate under this interest rate environment. the strategy is described here:

Anonymous   |     |   Comment #6
i've said this here before but my smartypig rate is still 2.01 pct and has been for at least six months. this is better than nearly all short-term CD rates. and even though the restrictions are annoying compared to other savings accounts, they are definitely better than a CD.
Anonymous   |     |   Comment #8
I've been struggling with this question myself.  I'm frankly wondering if it's worth investing in CDs at all and instead just aggregating funds in my savings account, where my monthly interest payments will likely exceed the return on a short to mid-term CD.  I'm thinking it makes more sense right now to just dump it all in an interest-bearing account and wait it out...
barrytuneup   |     |   Comment #9
i just use rewards checking accts. I have 3 currently (Patriot bank in FL, First National Comm Bank in PA, and Farmers and Merchants in VA) The Va bank allows up to 50k @3.51%, Patriot allows up to 35K (cut from 50k last month)@3.01% and Fist National Community in PA pays 3.04% up to 25K. This about all you can do today!!   Stop wasting time checking rate. i've already wasted enough time on following rates. They only go down. All these reward checking accts were at 4% 6 months ago. But it is worth using the debit cards 10x for each acct. I use them about 14x per month and use the direct debit paid from my credit cards and cable tv web sites to met the DD requirement. I also have a full and part time job so both my checks go into one bank 2x per month. Its worth the time to do this if you can keep track of all the requirements. I use each debit card the day after the interest is posted so its right at the beginning of the cyle. Each bank has a different cycle!! My next cycle begins on April 5th at First NAtional Communtiy. I averge about $15-$30.00 for each debit purchase and do not use the card for $1.00 transactions!! barrytuneup@yahoo.com   and my $ is liquid.  I use my PenFed credit card for gas and grocery purchases to get the 5% rebate!!
barrytuneup   |     |   Comment #10
Forgot to mention that these rates beat smartypig by 1.6%!! at 110k(which is the total you can keep in these 3 accts) it comes out to $1600.00 per year more. as long as the rates stay this way!!
Die Hard Saver
Die Hard Saver   |     |   Comment #12
Well I don't use those "reward" checking things, I don't use a CC or debit card, or hardly at all, I just closed my Citi card from AT&T cause they wanted me to spend 2400 or pay 60 bucks a year, BS, I only had a 2500 limit on the ****ed card as it was. So those reward things are of no use to me.

I been hearing rumblings about interest and the fed herer and there, even on the stock pusher CNBC so who knows, it may not be that much longer before rates start up, I guess.

Anonymous   |     |   Comment #13
i stick with smartypig b/c i have no desire to play the reward checking game. it seems like a game that i can only win by using way too much of my time and effort, and forcing myself to buy stuff. i use a rewards credit card that pays between 1 and 3 pct cash back (tax free!!) and do not need to force myself to make a certain number of purchases per month, balance multiple accounts, etc.