Looking at CD Rates With a Different Perspective

It's no secret that yields provided on bank CD (certificate of deposit) and savings rates are at all time lows. Week after week brings more of the same - either more bad news to savers or no news at all. Today you'll be hard pressed to get a one year CD yielding much over 1.0% APY, either from online banks or your local credit union. And if you've been in the market for a bank CD, you know it's been this way for quite some time. But are rates really as bad as they look on paper?

Let's view the current abysmal state of the bank CD market through the lens of a low inflation rate.

According to the Labor Department, for the period ending July 31, 2010, the consumer price index rose just 1.2%, while the core rate was up only 0.9%. This is the lowest it has been since 1966. And keep in mind the core rate excludes food and energy costs, which are so volatile they distort the overall rate.

Sure the long term inflation rate averages 3.0% per year, but this can vary widely. For example, in 1979 it was at an unheard of 13% while in 2008 it sat at just 0.1%.

What this should tell savers is that to truly recognize your gains you must weigh your savings rates against inflation rates. Understand that "Real" interest earnings are the interest rate minus the inflation rate, and the real rate reflects the actual growth in the buying power of every dollar you've stashed away.

That being said, let's examine the current inflation figures with your savings account rates. If you're willing to let your money sit in a deposit account for five years you can earn a 3.0% yield with some of the best five year CD rates, thus beating inflation by around a point. Ok - so beating the inflation rate by a percent or two won't make you rich, but since when have bank deposits made anyone wealthy anyway? What you should be looking for in your CD or savings account is assured incremental growth to supplement a diversified portfolio, offsetting more risky investment endeavors.

Adam Johnsons is an avid writer for some major financial websites including Bank Vibe a leading resource to finding the best CD rates available in the nation.

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