5 ways to beat low CD rates: Are they worth It?

Barbara Marquand | guest writer for GoTalkMoney

Although a boon to borrowers, today's low interest rates offer little reward for people socking away money in CDs.

Frustrated? Join the club.

But don't give up on saving. Most CDs still offer better returns than money market or savings accounts and, because they're covered by FDIC insurance, are among the safest investments around. Here are the pros and cons of five options to beat low rates and get the most from your savings.

1. Go for Longer-Term Certificate of Deposit

Long-term CDs generally carry higher interest rates than short-term CDs. Best seven-year CD rates for $1,000 deposits topped 3% as of July 1, while best rates for 1-year CDs were about half that amount.

But with interest rates at record lows, CD rates have nowhere to go but up, and you lose your chance to take advantage of higher rates when your money is tied up in a long-term CD. The American Bankers Association Economic Advisory Committee predicted in June that interest rates will rise modestly by the end of 2011.

2. Build a CD Ladder

A CD ladder is a group of CDs with different maturity dates to provide liquidity. You might build a 12-rung ladder of one-year CDs, for instance, each with a maturity date in a different month to provide access to the cash throughout the year. A CD ladder also spreads out your exposure to rate changes because of the variety of maturity dates.

Investors wonder whether to shorten a CD ladder -- invest in shorter-term CDs -- in a low-rate environment. Shortening the ladders gives quicker access to reinvest cash in higher-rate CDs in case rates go up. But what if rates don't rise as soon as you expect? Then you end up wishing you had left the money in longer-term CDs. No one knows for sure when the Federal Reserve will increase rates, so the issue is a tough call, even for experts.

3. Rising-Rate CDs

Rising-rate or bump-up CDs give you the option to increase the CD rate at some point during the term if interest rates climb. The downside? These CDs often start with a lower APR than conventional CDs on the market, and there's no guarantee the bank will increase its rates during the term.

4. No Penalty CDs

With conventional CDs, you forfeit some of your interest earnings if you withdraw money early. No-penalty CDs let you withdraw before the term is up without paying any interest penalty, an attractive feature that enables you to withdraw and reinvest money in a higher-rate CD in case interest rates go up before the maturity date. But like rising-rate CDs, no-penalty products typically feature a lower APR than other CDs on the market.

5. Indexed CD Investments

These CDs are tied to an index, such as the S&P 500, gold prices, or the Dow Jones Industrial Average, and provide a percentage of the return. You get a far better yield than you would on a typical CD if the index does well, but you get no return on your investment if the index does poorly, although your original deposit is safe. These CDs might look appealing at first glance, but they're complicated and difficult to compare to find the best deal, and they have stiff early withdrawal penalties. You forfeit principal, not just interest, when you take your money out early.

Although CDs are relatively simple investments, they come in greater variety than a generation ago. Understand a certificate of deposit's features, penalties, and maturity date before investing, and question any deal that sounds too good to be true. Regardless of the rate environment, don't be afraid to invest in CDs at different banks. Search online for the best CD rates to meet your savings goals.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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