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Looking at CD Rates with a Different Perspective


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It's no secret that yields provided on bank CD (certificate of deposit) and savings rates
are at all time lows. Week after week brings more of the same - either more bad news
to savers or no news at all. Today you'll be hard pressed to get a one year CD yielding
much over 1.0% APY, either from online banks or your local credit union. And if you've
been in the market for a bank CD, you know it's been this way for quite some time. But
are rates really as bad as they look on paper?

Let's view the current abysmal state of the bank CD market through the lens of a low
inflation rate.

According to the Labor Department, for the period ending July 31, 2010, the consumer
price index rose just 1.2%, while the core rate was up only 0.9%. This is the lowest it has
been since 1966. And keep in mind the core rate excludes food and energy costs, which
are so volatile they distort the overall rate.

Sure the long term inflation rate averages 3.0% per year, but this can vary widely. For
example, in 1979 it was at an unheard of 13% while in 2008 it sat at just 0.1%.

What this should tell savers is that to truly recognize your gains you must weigh your
savings rates against inflation rates. Understand that "Real" interest earnings are the
interest rate minus the inflation rate, and the real rate reflects the actual growth in the
buying power of every dollar you've stashed away.

That being said, let's examine the current inflation figures with your savings account
rates. If you're willing to let your money sit in a deposit account for five years you
can earn a 3.0% yield with some of the best five year CD rates, thus beating inflation
by around a point. Ok - so beating the inflation rate by a percent or two won't make
you rich, but since when have bank deposits made anyone wealthy anyway? What you
should be looking for in your CD or savings account is assured incremental growth to
supplement a diversified portfolio, offsetting more risky investment endeavors.
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