The Fixed Income Dilemna - High Return Cds Aren't What They Used To Be
High return CDs were all the rage when they first became available, and were a great place for seniors and or retires to put money safely. Back in the heydays of the CD retirees were able to live comfortably off the income of those investments. That is not the case anymore.
Putting your money into high return CDs can be a risky place for your money if the bank you give you money to is in danger of insolvency. Many bank advertisements online these days are trying to attract investors to buy their high return CDs. What I have been noticing in these ads is that at least a few of the higher rate CD offers are coming from banks that are either financially stressed or have already received TARP money. Why does that matter to you?
CDs Offer Slightly Higher Return, But What Is the Catch?
Consider a certificate of deposit made at a savings bank. That money is taken by the institution and held in an account for the client to which access by the client is restricted. That money represents (in financial terms) a loan you are making to the bank for a specified period of time for which you will be paid interest. Given the rates on these loans are much cheaper than regular borrowings would be, banks obviously would very much like to have as much of clients' money on long term deposit as possible rather than have to find other financing.
Be Leery of the Highest Yielding CD - They're Not Only for Your Benefit
What is important however, is that some banks will want your money more than others, and will offer a better high return CD than their competitors. Rather than just plonking money down, clients should be asking, "Why are they offering more than the other banks?" In some cases it is because they are desperate to attract cheap (read: your) money, because other sources of funds have dried up, or worse, because other customers are yanking their deposits out (yikes!). If your bank is financially stressed and in the news, or has received TARP money... is the risk of losing access to your funds for a period of time really worth the extra quarter percent? Sometimes the high return CDs you're looking at isn't the best place for your money.
This is why I typically recommend friends and family put their money in an online high yield savings account instead of a CD. The advantages are numerous: availability of funds, the ability to select banks that specialize in managing savings deposits, and the flexibility to move money when rates are more favorable.
