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4 traditional CD alternatives to keep your money growing

June 15, 2011

| Money Rates Columnist

With interest rates on certificates of deposits, savings accounts and money market accounts so low these days, many people are contemplating other types of low-risk investments.

The problem is that even the best CD rates are stuck at less than 2.4 percent for five-year terms and more typical CD rates are around 1 percent for shorter-term certificates of deposit. Who wants to tie up their money for such a paltry return--even if your principal is secure and your deposit up to $250,000 is insured by the FDIC?

Consequently banks and other financial institutions are starting to roll out some competing products that are still relatively safe but give investors an opportunity for some additional return. Keep in mind that greater risk usually accompanies a greater opportunity for increased return. It's also true that that if you want more flexibility to cash in on increasing interest rates for CDs, you usually are required to accept a lower starting interest rate.

With those caveats in mind, here is a round-up of some of the more recent options:

  • Rising rate CDs

    Although many experts keep predicting interest rates will soon go up on certificates of deposit, savings accounts and the typical money market account, it has yet to happen. To counteract investors' fears that they will be locked into a low-yielding CD and miss the best CD rates, they've introduced the rising rate CD.

    Rising rate CDs come in different varieties but they all allow investors to raise their rates a specified number of times during the term of the CD.

    For instance, a bump-up CD gives investors a predetermined number of opportunities to increase their interest rate, provided interest rates are, indeed, climbing. One example is the Bank of America Opt-Up CD, which has an 18-month term and allows investors to increase their rate once after the first six months.

    Another example is the step-up CD, which increases automatically a predetermined number of times if interest rates climb. Liquid CDs, meanwhile, allow investors to pull out of a CD and invest in a higher-rate CD if interest rates go up.

  • Commodities CDs

    This certificate of deposit might appeal to investors who think CDs are boring. It protects your initial investment the way a traditional CD would, but it also allows investment in 10 commodities, including gold, silver, platinum, copper, nickel, crude oil, soybeans, corn, sugar and lean hogs.

    EverBank's MarketSafe CD is an example of this product, but it hasn't received stirring endorsements from financial advisors because it limits the amount you can make from the commodities. Although it might outperform the best CD rates over a five-year term, critics from the Wall Street Journal suggest you could do better by investing some of your money in a traditional CD and the rest directly in commodities, where your returns won't be limited.

  • Fixed annuities

    Fans of fixed annuities, common among retirees who want to increase their retirement income, note that their interest rate often beats CDs, and many allow the freedom to withdraw up to 10 percent of the annuity without paying a penalty. The drawback is that your principal is not insured by the FDIC the way a certificate of deposit is.

  • Dividend-paying stocks

    These are the riskiest alternative to CDs, because the stock you buy could lose value. But if you're investing in a company with a solid performance record, the dividends they pay could be reinvested in more stock. Keep in mind, however, that companies can stop paying dividends at any time.

Your responses to ‘4 traditional CD alternatives to keep your money growing’

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20 July 2011 at 12:33 pm

CD rates truly are dismal these days in our state of economy, hopefully things will improve. If you're still considering CD's, I recommend checking out your local credit union, I use https://www.obee.com and find that typically they offer better interest rates then banks typically do.

NO stocks 4 me

19 June 2011 at 5:40 pm

For CD people, who are just into CD's 3 of these wouldn't even get my attention only No.1 may be something to look at.All I can say to the CD investors looking for security of Principal is just keep calm, and as always stated, just go with the best deal you can find that makes you comfortable for now. I've been doing this for a while and remember times like these a couple times in my life. I still remember rates up as high as 15% on CD's in the 70's, when of course I was younger and didn't have any money to stick into one. I also remember them going down pretty much as low as they are now for about a year or so. So if you have a retirement and have saved enough by now, all you can do is cut out the BS and live a bit lower to hold on to your money until rates go back to where your comfortable, for me thats around 4% for long term money at my age. I stay well within my living expenses, I do not have a cell phone, IPad or anyting else I, no LCD TV (yet) and use dialup ISP service, I also have no other bills at this time.

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