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600 Billion Reasons To Stay In CDs

Percentage sign and down arrow combinedAmericans lost hundreds of billions of dollars in buying power to inflation since the recession largely because they abandoned certificates of deposit for low-paying checking and savings accounts, new research has found.

Indeed, balances in CD accounts declined by 37% between 2008 and 2013, while liquid account balances increased by a whopping 89%, behavioral economist Dan Geller found.

The trend continues.

In the first three months of this year, savers pulled more than $20 billion from CDs and added $77 billion to savings accounts, according to Federal Reserve data.

Geller, who operates the San Rafael, Calif.-based Money Anxiety Index, calls this shift “an intuitive rather than analytical financial decision” savers continue to make.

Translated, that means people fear the future and don’t want to lock up their money in CDs.

This has cost Americans nearly $600 billion in buying power because inflation has outpaced the average rate Americans have collected from their deposit accounts in five of the last six years, Geller says. The average annual return on savings and checking accounts during that time has been 0.62%, while average CDs paid 1.39%.

Geller says Americans “could have preserved the erosion in their buying power” had they stayed in CDs. We agree, but there’s a big caveat we’ll get to further down in this post.

Using FDIC and Bureau of Labor Statistics data, Geller found the deposit interest rate fell below the inflation rate in every year except 2009.

We’re reprinting the table below and breaking out the average 5-year CD rate we found for each of those years.

Keeping pace with inflation?

Year Savings rate 5-year CD rate Inflation
2008 2.02% 3.21% 3.80%
2009 1.11% 2.23% -0.40%
2010 0.79% 1.90% 1.60%
2011 0.55% 1.50% 3.20%
2012 0.38% 1.06% 2.10%
2013 0.29% 0.80% 1.50%

Average 5-year CDs, of course, haven’t fared much better against inflation than other deposit accounts. To be clear, you would have lost buying power (just not as much) by investing in the very best short-term certificates or average 60-month CDs.

But that’s why we always say — particularly in a time of exceptionally low interest rates — you cannot settle for average.

Today, the average 5-year CD pays just 0.80% APY. The top nationally available deal on our CD Rates Leaderboard pays 2.31% APY. And the best deal on our list of highest CD rates from credit unions and local banks pays 3% APY.

Those yields are far above the 1.84% annualized rate of inflation for the last six months, according to Bureau of Labor Statistics data.

Bottom line: If you want to stay in safe, protected investments, grab the very best certificates of deposit to guard against eroding buying power.

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