Now Is The Time To Lock In Interest Rates With CDs
If you're a saver, the Fed flipped you the bird this week. They dropped interest rates and introduced "quantitative easing," two things that will make interest rates plummet. Here's how you can protect yourself.
First, a brief monetary policy overview. When the fed lowers the target federal funds rate, the rate banks charge each other for overnight lending, they don't just change a number on a board somewhere. They actually pump more money into the system so demand, and interest rates, for overnight lending goes down to hit their target. This worked in the past because cheaper money means more investments... but it hasn't been working lately (the actual federal funds rate has been under 0.20% since early December according to the NY Fed). The scary part of their announcement this week wasn't the range target of 0.00 - 0.25%, it was the part about how they'd be using "quantitative easing" to try to stimulate the economy. Quantitative easing is fancy Fed-speak for "they're going to run the printing presses at the Mint 24/7 and start force feeding dollar bills into our hunger striking economy." This means interest rates across the board will fall dramatically, as you may have read with mortgage rates.
If you're a saver, this sucks because you'll be earning less on your savings. Right now the best thing to do is to start locking in rates in certificates of deposit (CD). A CD is a product you can get at any bank, is FDIC insured, and returns a fixed rate over the term of the CD. With a CD, your principal is protected. I maintain a frequently updated list of the best CD rates of terms no greater than 18 months that currently has rates as high as 4.00% APY.
I would warn against getting a CD that is too long term (like five or ten years) because when the economy recovers, the Fed will have to deal with inflation. Whenever you start printing money, which we have been doing for the last few months, inflation is always a problem and when we have high inflation, your locked in CD will do more harm than good.
I recommend that you check with all the banks you already have accounts with first, because rates have already begun to fall so you'll want to act quickly. Like right now. Go!
Jim writes about personal finance at Blueprint for Financial Prosperity.
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Comments:
Carp, I didn't heed this warning the last time Consumerist posted it, so I've learned my lesson! Its worth noting, at least in my case, where I would like to use my current bank's CD, but in the fine print they indicate that in order to receive the "promotional rate" it must be "new money" that opens the account. So it looks like I'll have to find an alternative bank. Anybody have any experience with GMAC Bank?
@sideffects: Trying not to be depressing is hard in these situations. Last year inflation (actual purchasing power inflation, real cost of living etc.) Was at about 15%. That means you had to earn 15% more than you did in 2007 to maintain the exact same quality of life. Doing the exact same things.
Next year, thanks to bailouts, stimulus and a lot more spending it's going to be way worse. Any investment that doesn't earn at least 15% isn't making any money at all. You are losing money.
If you can find an investment thats earning more than 15% great. If not I recommend a basket of staple commodities. Because even when the dollar falls in value, the same amount of silver is going to buy approximately the same amount of gas or food.
Your dollar, even with 5% more, will definitely not.
I have some 4.10% 1 year CDs at ING that mature in August of 09. I'm not looking forward to the rate readjustments.
/at least ING gives you a .10% bonus for renewing a CD.
Also, note that
1) ING only compounds interest yearly. IE the interest you earn is not added back to the principle to calculate future interest (except at the end of a year).
2) ING allows you to skim the interest off the top month to month. So if you have say $20k in a CD at 4%. That CD earns $800 per year. You can have $66.66_ deposited per month into another account. (heck, take that money, save it up, and get another CD with it).
@sirellyn:
How do you get to 15%? I'm curious as to your math. Very curious. Housing's cheaper, gas is cheaper, food's modestly more expensive, clothing's cheaper... 5% or thereabouts, I'd believe, but 15% is pretty outlandish.
As for finding a good, inflation-hedged investment, you're best off going with equities in the longer term, and cash deposits or TIPS in the shorter term, not commodities. Commodities are hugely volatile and highly speculative in the short-term (silver, your example, is down 27% since the start of 2008).
I really wish I had enough cash to put in a CD right now. Unfortunately I've only been in the professional world for a year and somehow I feel putting $1K in emergency savings to earn a whole $35 interest doesn't feel worth it.
Instead I plan on putting my money in collector's plates. :P
In all seriousness, I've been debating on buying silver but it seems that I missed the boat (it was $9 a few months ago and I was this close to getting some)
@battra92: You don't want to be putting your emergency fund all into one CD because if you ever need it, you'll have to pay a penalty to access it.
@Blueprint for Financial Prosperity: not always true. there are penalty-free cds. got one of 'em right now.
Might not be a bad time to buy a couple of CDs in your IRA for those end of the year contributions.
Nothing like plain old fashioned saving money and locking it away, so much for all that theory about a 401(k), IRA, Bonds, Property/Gold/Oil/Auto investment etc.
I'm not saying they're bad, but nothing beats simple, low risk saving.
@sirellyn: @JustThatGuy3:
sirellyn is absolutely correct infact, I don't think any commenter should comment until he reads his comment..to get the math of his statement, you just have to look at the CPI and PPI of the American Economy. You will never see the Fed allude to these numbers because it will put their distortions of the market, public.
That being said, if you want a safe bet for savings, you SHOULD invest in recession proof things like gold and silver.
I know someone will make a point and say gold and silver are down this quarter bla bla bla, but if you go back 30 some odd years, gold and silver has been multiplied in price and has had its value increase every single quarter... people should not be afraid of one bad quarter..
just go here, http://www.ronpaul.com/misc/gold-price-chart/
The distortions in gold trading are also contributed to the Fed. Since the Fed prints money out of no where, and has been doing so since the Great Depresesion robbing any wealth for you and I, they also own the vast majority of the US gold supply because they made everyone buy into the system of paper money after the great depression essentially robbing everyone's wealth in gold at the time..
Great way to put it in comparison, you take a boat and a crew. You drop a wad of 100's overboard, it will be an issue but it wouldn't be that bad or the end of the world. You drop that same value of gold overboard, you will see half the people on the boat go after it.
Now with being at 2 wars and the Bush administration putting America into 11 Trillion dollars of debt mostly to China and Japan paying for the Iraq war, we are offering US treasury notes as collateral and numerous companies will come to America and buy American because they can and it will be cheap. This situation is going to get worse before people wake up and smell the coffee.
@sirellyn: @JustThatGuy3:
sirellyn is absolutely correct infact, I don't think any commenter should comment until he reads his comment..to get the math of his statement, you just have to look at the CPI and PPI of the American Economy. You will never see the Fed allude to these numbers because it will put their distortions of the market, public.
That being said, if you want a safe bet for savings, you SHOULD invest in recession proof things like gold and silver.
I know someone will make a point and say gold and silver are down this quarter bla bla bla, but if you go back 30 some odd years, gold and silver has been multiplied in price and has had its value increase every single quarter... people should not be afraid of one bad quarter..
just go here, [www.ronpaul.com]
The distortions in gold trading are also contributed to the Fed. Since the Fed prints money out of no where, and has been doing so since the Great Depresesion robbing any wealth for you and I, they also own the vast majority of the US gold supply because they made everyone buy into the system of paper money after the great depression essentially robbing everyone's wealth in gold at the time..
Great way to put it in comparison, you take a boat and a crew. You drop a wad of 100's overboard, it will be an issue but it wouldn't be that bad or the end of the world. You drop that same value of gold overboard, you will see half the people on the boat go after it.
Now with being at 2 wars and the Bush administration putting America into 11 Trillion dollars of debt mostly to China and Japan paying for the Iraq war, we are offering US treasury notes as collateral and numerous companies will come to America and buy American because they can and it will be cheap. This situation is going to get worse before people wake up and smell the coffee.
@LastVigilante: I didn't heed the warning either, so today I've opened a GMAC Bank savings account. I'm hoping it goes smoothly!
Unfortunately, no, when I said countries will come into America and buy American, I don't mean our products, I mean our resources.
"gold and silver has been multiplied in price and has had its value increase every single quarter"
This is simply, 100%, not true. If you bought gold in 1979, you would have had to wait until 2007 for prices to get back to where they were when you bought it. Gold is a commodity, and highly volatile. It's a speculative investment, pure and simple.
"Great way to put it in comparison, you take a boat and a crew. You drop a wad of 100's overboard, it will be an issue but it wouldn't be that bad or the end of the world. You drop that same value of gold overboard, you will see half the people on the boat go after it."
This is only true if you're on a boat with idiots.
"to get the math of his statement, you just have to look at the CPI and PPI of the American Economy"
That's exactly the point, I _did_ look at CPI and PPI. From Nov 07 to Nov 08, CPI was up 1.1%. That's, oh, 13.9% shy of his claim.
But hey, it was a good rant, don't let all that inconvenient data get in the way.
"gold and silver has been multiplied in price and has had its value increase every single quarter"
This is simply, 100%, not true. If you bought gold in 1979, you would have had to wait until 2007 for prices to get back to where they were when you bought it. Gold is a commodity, and highly volatile. It's a speculative investment, pure and simple.
"Great way to put it in comparison, you take a boat and a crew. You drop a wad of 100's overboard, it will be an issue but it wouldn't be that bad or the end of the world. You drop that same value of gold overboard, you will see half the people on the boat go after it."
This is only true if you're on a boat with idiots.
so, say I had about 40 thousand in a high-yield online savings account (currently at 4% apy). SHould I put the majority of it (say...27 thousand) in a 16 month cd locked in at a fixed rate 4%? I wont be needing the money (I have no debt nor any foreseeable need to use the money). I figure keeping about 13 thousand in the high-yield online savings account just in case some unforseeable need arises.
Sound prudent?
@forgottenpassword: Sure if you're just going to leave it in savings. (Stocks are on SALE!!!!) Rates are unlikely to rise in the next year, although 16 months could be too long. You could also look at [www.highyieldcheckingdeals.com] to get a checking account paying 6%, which might stay at 5% during that period.
"This is simply, 100%, not true. If you bought gold in 1979, you would have had to wait until 2007 for prices to get back to where they were when you bought it. Gold is a commodity, and highly volatile. It's a speculative investment, pure and simple."
I knew someone would bring up 1979, 1979 marked the end of the barro gold standard thus making the whole us monetary system into a complete fiat money supply. The US Constitution authorizes only coined money in gold and silver because it is worth its weight in gold and alleviates the need for a central bank. That central bank being the US Federal Reserve which is a completely privately owned international interest groups and is not part of the US Government regulates the money supply in America.
If you look at a dollar bill pre-fed days and today, which you will see "This note is legal tender for all debts, public and private" is now on the bill meaning this dollar is absolutely worthless because the dollar is only as good as there is much in circulation.
The Fed has the power to create money out of thin air thus controlling the US Monetary system.
So, you're trying to tell me that our forefathers from 200+ years ago that knew about central banking and thus authorized the gold standard is less viable then the paper fiat money that's in circulation now? Keep in mind that the Fed has the authority to create and print money as well as control US interest rates.
Let me refer@JustThatGuy3:
Whatd you look at CPI from the government site ? lol
take a look at this article and reflect that in situation in your life
Also let me also inform you that if you compared the price oil in the 5 years as it pertains to the value of gold, you will see that the price has been most what stable unlike US dollars
I am just plain confused about all of this. I'm not an economist or any type of financial type. Can somebody please put all of this into layman's terms, for me and others like me? What are we really facing here?
@Chong Soh: hmm, looks like my pessimistic outlook has been confirmed, oh joy!
bust my ass to save for college for me or my kid or my hubby in quite likely futile effort at a better income; or b.m.a. for retirement on the dog food plan for me or my hubby; or b.m.a for the down on a house in a decent neighborhood; or b.m.a trying to take care of pick a grandparent. . . which one? cuz sure as hell not going to be able to do more than 1. . .decisions, decisions. . .
I don't really want to be the bearer of bad news but the situation America is facing is really really dire, alot worse than people think.
We are on the verge of the collapse of the US dollar and straight poverty for America. The Fed in collusion with the US Gov't, has been slowly and knowingly been destroying the US dollar and killing the American economy. Whether you want to believe, the Gov't is illegal, conspiracy theories, or whatever, you can't deny the facts.
The Federal Reserve, is a private bank that prints money and controls inflation in the American economy. The Federal Reserve is NOT part of the Government, nor is the IRS.
The Fed has for the past 80 or so years been robbing Americans of their money from right under you nose and guess what, Americans are pretty broke now, so there isn't much to left to take.
Inflation is nothing more than a better sounding term than debasing the dollar, or even more laymen, destroying the dollar because the Fed controls the money supply AND interest rates by printing money out of thin air and putting that into the circulation. Just like with baseball cards, the more of you have one item the less its valued, just like the American dollar.
Whether you want to believe it or not, The Federal Reserve has already put in place a new monetary system that will replace the American dollar once it collapses, it will be called the Amero, a euro type deal combining the Peso, candian dollar, and the American dollar.
You don't believe me? The US Debt is now over $11 trillion dollars, we continue to borrow billions of dollars from China to fund the US life style, just like any broke person in debt, the time to pay will come and its here upon us.
With the government bailing out the financial markets and the car markets ON credit, will allow the Fed to print more money and thus killing the dollar.
You should youtube, Ron Paul or Peter Schiff, they have predicted these financial meltdowns decades in advance. I recently learned about Ron Paul during the Presidential Campaign, he is a great guy and definitely worth youtubing if you care to believe anything I say.
I'm not even going to bother. If you're convinced the Fed is a privately owned conspiracy, you're going to believe it, because you WANT to believe it, facts be damned.
"The Federal Reserve is NOT part of the Government, nor is the IRS."
Um, yes they are.
"Whether you want to believe it or not, The Federal Reserve has already put in place a new monetary system that will replace the American dollar once it collapses, it will be called the Amero, a euro type deal combining the Peso, candian dollar, and the American dollar."
No, they aren't. Come up with any coherent piece of evidence that doesn't come from a tax protestor/conspiracy site about this. Go ahead.
They're both commodities. Both spiked in mid-08. Correlation =/ causation.
Also, the price has been notably more stable in Euros - but that's an evil fiat currency too! How can this be? Must be a European conspiracy.
I mentioned CPI because, well, you brought it up. I apologize, then, I should have understood that when you said CPI, you meant "CPI as I define it, which is entirely unclear, but supports my point, even though actual data doesn't."
Also, that article's from 2006.
Fundamentally, the gov't is trying to reduce the cost of both investment and lower the benefit of saving, in an effort to get people to spend, and get businesses to invest, in order to get the economy moving. As a result, they're pumping money into the economy, which brings down interest rates. This helps borrowers (less interest to pay) and hurts savers (less interest earned). If you buy a CD now, however, you can "lock in" current rates. This is a reasonable thing to do if (a) you won't need the money for the life of the CD (buying a 2 year CD with money you're going to need next month is a bad idea), and (b) you think interest rates are going down.
I just want to know why if interest rates are going lower, why the rates on credit cards are going up?
@Ingram81: The risk of consumer credit default is increasing. The target interest rate can have an effect on credit card rates but the risk factor takes precedence.
@Blueprint for Financial Prosperity: Savings rates are decreasing, default risk is increasing. Not a good combination. If you lower the savings rate, people should be more likely to pay off their debts instead of saving, and maybe the higher CC rates is another impetus for that. I just dont think the two together is a great combination.
@Ingram81: Card issuers have to comply with regulations on their portfolio's profitability or risk being taken over by the gov't. thus, new floors everywhere.
The foul part is that the industry uses the credit profile concept to get around the ban on universal default. After all, missing a payment, reducing a credit line or closing an account typically results in a lower credit score & thus a lower credit profile; which leaves you open to further line decreases, line freezes, account closures & rate hikes.
Makes for a lovely Möbius Hell strip.
@JustThatGuy3: I would like to thank you for being a voice of reason on these here consumerist commenting boards.
You looked at a one year delta, I am telling you to look at the big picture.
That article being in 2006 further illustrates the instability of the US dollar system considering the fact the economy was not hinting toward a recession until 2007.
I originally had a detailed thread to rebut your atagonist remark but I'll just end it with this.
You have an opinion and you are entitled to it but don't debate me by telling me my arguments are crazy conspiracy theories and just attacking the notion of the possibility.
With that said, Ignoramus et Ignorabimus.
"You looked at a one year delta, I am telling you to look at the big picture."
I looked at the data you told me to look at. If there's other data you want to look at, please link to it and I'll take a look.
"You have an opinion and you are entitled to it but don't debate me by telling me my arguments are crazy conspiracy theories and just attacking the notion of the possibility."
That's just the problem - your arguments aren't arguments, since they're based on faith, regardless of facts.
As for the wikipedia article you cite, you should probably read it, before you make assertions that that Fed is some "private" organization: "The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit."
Hmmm...so you are getting a 4.25% interest rate on a 10 month CD probably. when you subtract the ordinary income tax capital gains and inflation from that return your are netting less than a 1% gain
Again, how is this a good thing???
Just to note the printing presses haven't stopped since Bush got into office.
CD rates in europe are reaching 7% and I have an account in irak paying 9% but who can guarantee that? lol I only have 2.000 invested just in case it works.
"The Federal Reserve has already put in place a new monetary system that will replace the American dollar" ... you're talking about a loosely developed proposition that's been floating around for a decade, and is not actively supported or pursued by any major political parties or most serious economists from any NAFTA members. Could it happen someday? Sure, but at this point you're blowing a lot of hot air.
I have a WaMu (well, Chase) CD that get's 4.25% APR. Baybay!