Collectively, Americans are saving more money than they have in many years. Unfortunately, at the same time, interest rates on savings accounts are bottoming out.
Money expert Clark Howard says that the combination of these two things presents a dilemma for savers: Where to stash money you’re not ready to invest but also don’t expect to touch for a while?
Here’s why Clark favors investing in CDs (Certificates of Deposit) over online savings accounts given the current conditions.
Have Some Cash to Set Aside? Here’s Why Clark Likes CDs Right Now
These turbulent economic times have turned things upside down. Conditions for borrowing money to buy a home or car have rarely been better. But people who are trying to save money are finding that they’re able to get very little in the way of returns.
“As you’re saving more, what you can earn on that money is going down because the Federal Reserve — in order to rescue the U.S. economy — has manipulated down the interest rates it controls to around zero,” Clark says. “That is having a spinoff, indirect effect on what you can earn on savings.”
Clark thinks that even though CDs are typically paying slightly less than online savings accounts right now, he expects savings account rates to drop even more over the next year. For that reason, he currently favors one-year CDs over simple savings accounts.
“I know this is going to sound like I’ve lost my mind. It’s probably better for you to buy — with money you know you’re not going to need for a while — CDs from one of the online banks, even if they’re paying a whisker lower than what you can earn in simple savings. That’s because I expect the rates for simple savings accounts to continue to drop and end up significantly lower than what you can get on a one-year CD right now, which is about 1.5% with the online banks.”
CDs vs Savings Accounts: What’s the Difference?
CDs and savings accounts differ in a few ways. The biggest is the financial penalty you’ll usually pay if you withdraw your money early from a CD, for example, pulling your money out before 365 days on a one-year CD.
Typically, you might forfeit 90 days’ worth of interest on your money. But with rates so low, unless you have a lot invested, that’s not a big hit to take.
If you’re not comfortable with that prospect, Clark still whole-heartedly endorses keeping your money in an online savings account that will pay you some decent interest.
How to Find CDs With the Best Interest Rates
Returns on both CDs and savings accounts are not great right now. But if you’re looking for a safe harbor for money you don’t think you’ll need very soon, consider looking at online banks, or you can use this handy BankRate.com tool to find this month’s best CD rates.