Selecting Your Certificate of Deposit Term
Selecting a CD term these days is not a decision that comes easy, and it can generally take on somewhat of a rather bleak ‘why bother’ outlook. When weighing all the options, things tend to boil down to either a rock, or a hard place, if the choice left to make is nothing more dismal than a low interest rate versus a very low interest rate. While purchasing a shorter term CD is certainly coupled with winding up with a lower interest rate, the logic still indicates is may just be the smartest option in this uncertain economic atmosphere. In other words, brief is better.
The premise comes from two primary factors that drive this decision. The first is the necessity for maintaining some level of liquidity, for any number of financial reasons. If this is not a concern, either in the immediate or intermediate range of fiscal requirements, then the decision will be based on more of a roll-of-the-dice kind of financial foundation, where the current economic situation drives the interest rate choice. Either way, the present atmosphere seems to suggest that CD terms should best be kept on the short side of the measuring stick.
The Current Financial & Economic Landscape
Looking at the economy at the present time, as well as what can be seen in any forecasting models, when the CD interest rates are factored in, things still point to short term lengths being the wisest move. The basis for this is because the overall state of the economy sees to indicate an upward tilt in momentum. The Bureau of Economic Analysis put forth a bit of news stating that the country’s gross domestic product index (GDP) increased at a rate of 3% during the last three months of 2011. This figure had made a surprising jump from 1.8% in the second quarter.
Since low rates of interest are generally a reflection of a so-called ‘soft’ economy, nevertheless, the growth in the GDP seems to foretell a change may be on the horizon. On the other hand, the rate of inflation could become a problematic influence. February of 2012 saw a small rise in the inflation number, which may be further pressured by rising energy prices as the summer months get closer.
CD Risks vs Rewards
Next, there is a narrowing of the spread between short term length CDs and long term length CDs. The Federal Deposit Insurance Corporation (FDIC) has released statistics indicating that the interest rate across-the-board average for CDs offered 1.88% more for the 5 year CD than for the 30 day CD in the final months of 2009. By comparative contrast, that spread had decreased to only 1.05% as of the close of February of 2012. This translates into receiving a much smaller monetary reward for pledging funds for a longer period. Once again, regardless of short-term liquidity requirements, all indicators point to shorter terms for CDs at the present time.
As tough as it may seem for CD interest rates right now, accepting the low rates is not something one has to capitulate to. One strategy is to seek out low exit penalties. Naturally, this defies the rule of keeping CD terms short. However, if there is a long-term CD out there with a low enough early withdrawal penalty, then it is almost as good a strategy as having a short-term length CD, except with a slightly better interest rate. It just boils down to financial priorities, and how the interest rate plays against factors of both time and security. Regardless of the challenges ahead for CD investment strategies, some form of economic peace of mind will usually be determined by a reliance on adaptability during these troubled times in this low interest rate environment. So, shop around diligently, and keep a short CD profile is the best advice, for the long run.
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