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Investing in Certificates of Deposit Is Safe But Are You Ahead of Inflation?

Investing in Certificates of Deposit Is Safe But Are You Ahead of Inflation?

BEST CD RATES:  With all the financial turmoil these days the stock market is a scary place to invest right now. In the long run investing in stocks will garner a higher rate of return. Right now you might want to think about selling some equity holdings and parking the cash into a certificate of deposit.

Granted bank CD rates along with other deposit account rates like savings account rates and money market account rates are paltry. If you're looking for a home loan mortgage rates are also very low right now. The reason why is the economy is slow and inflation is low. Just make sure when you factor in your tax rate and the inflation rate that your CD investment is actually staying ahead of inflation.

Here is an example, say 1 year CD rates are at 1.50% right now and you are in a 20 percent tax bracket. Your actual return on investment will be 1.20% after taxes. If inflation is higher than 1.20% you're losing purchasing power on your money. Granted your CD investment is safe and you won't actually lose any principal as long as your deposit amount is $250,000 or less.

So there are advantages of preserving your capital but having money stashed in a certificate of deposit, savings account or money market account. As you get older and have your investments are in less risky assets you really don't have a choice but to invest in deposit accounts.

Eventually interest rates will bounce off these record lows but right now the highest CD rates on 1 year CDs are about 1.20% and the best savings account rates are also around 1.20%.

You can find the highest CD rates by searching our rate lists and reading reviews here: Highest CD Rates.

Author: James Martin
September 7th, 2011