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Getting Top CD Rates

Learn how a laddering strategy is key to locking in the best CD rates.

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Right now, you can earn more -with greater flexibility and no added risk-by putting your cash in a money market account than you can by locking it away in a five-year certificate of deposit.

That's because of a so-called inverted yield curve, when demand for long-term treasuries pushes their yields below short-term rates. In the past, the scenario has often occurred in advance of a recession.

For anyone trying to figure out where to park cash now, that presents a quandary about whether to put one's money away for the short or long term. But that can be overcome with some smart moves.

Those moves depend upon what your goals are for the money, as well as your horizon. If, for example, you're just saving for a rainy day, then the flexibility of pulling the money out without penalty may trump the security of earning a guaranteed return. And if you're Internet-savvy, you can use sites like to chase high-yield money market and savings rates at a growing collection of online banks, like the 6 percent now offered on the online savings account. (Heed the fine print, though, as some banks' high rates are offered only as "teasers" that revert to lower ones after three months or so.)

As with CDs, money market accounts offered by banks and thrifts are federally insured up to $100,000, and many include check-writing privileges. Some require a minimum $10,000 deposit, although you can find plenty-like those from HSBC and EmigrantDirect (which both currently yield more than 5 percent)-that ask for only $1 to get you started.

If, on the other hand, you're a retiree counting on the interest for your nest egg, or if you don't want to be bothered going online every time the changes its mind on interest rates, then a long-term CD might be just the ticket. Right now, for example, you can lock in a 5.75 percent rate at E-Loan and not have to think about it again for five years. (That is, unless you want to pull the money out before then. If so, you'll have to forfeit six months' worth of interest.)

Mixture. For most people, the smartest bet may be a mix of the two. Or, for that matter, three, four, or even five. If you're putting money away for a down payment on a house in five years, "then I'd suggest doing a third in a money market, a third in a two-year CD, and another third in a five-year," says Martin Mesecke, a Plano, Texas, financial planner.

This way, you build a "ladder" of CDs with varying maturities and rates of return. When the first matures, you simply buy another at the far end of your horizon. By repeating the process each time the next comes due, you create rungs on a ladder that average out your overall return, much as stock investors do when they add money once each quarter instead of plowing all of it in at once. If long-term rates go up but short-term ones stay put-as some economists expect-you can trim your money market savings and buy more CDs. If long-term rates fall, short-term rate reductions probably won't be far behind. So you might as well keep building your CD ladder to even things out.

Now that the Federal Reserve has put at least a temporary halt to its inflation-fighting campaign, this could be an especially good time to start one. "You can lock in a great rate on some of your money now," says Los Angeles money manager Marilyn Cohen, "but you'll still have plenty of flexibility."

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