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How to Make the Most of Your Savings


Learn how to ladder CDs to maximize return.

The economic downturn has led many to boost their savings.

Some economists predict the savings rate, the difference between earnings and expenditures, will rebound to 3% to 5% this year after a negative rate in 2005. Earlier this year, Goldman Sachs estimated that the savings rate could go as high as 6% to 10% in 2009.

But interest rates are painfully low and are unlikely to rise anytime soon. One solution: laddering your certificates of deposit.

Each rung in the ladder is a different maturity date. Purchasing short- and long-term CDs allows you to spread out the interest rate risk. You may not earn as much as you could by locking your money in for more than 5 years, but you will be able to catch higher rates in the future.

If you have $100,000 to set aside, consider putting $20,000 in 5 separate CDs with maturity dates 1, 2, 3, 4, and 5 years in the future. As each CD matures, roll the money into a new 5-year CD. This will allow you to lock in the best current interest rate available while being able to get your hands on $20,000 each year if needed, thanks to the staggered maturity dates.

If interest rates fall, you've got 80% of your money locked in at a higher rate. If interest rates rise, you can get a higher rate each year because you haven't locked all your money into a single, long-term CD.

However, if you might need access to your money on short notice, keep the terms shorter. Warning: this will sharply reduce the yield.

The Federal Deposit Insurance Corporation now insures deposits up to $250,000 per depositor through December 31, 2013. Unless Congress acts, the amount will return to $100,000 per depositor for all accounts except IRAs on January 1, 2014.

As pitiful as current interest rates are, a CD will boost the yield beyond a savings or money market account. Rates vary among banks, so shop around. Bauer Financial is a good place to compare interest rates. It also ranks the strength of individual banks, but charges for the full report.
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