College Connect: Not the time to tie up money in CDs

Posted By sabew

Theo Keith Saving and Investing in College

If, a year ago, you didn’t think CD rates could possibly go lower, you were wrong. Then again, so was just about everyone else.

In summer 2009, the business news media speculated about surging inflation as the economy recovered from the worst downturn since the Great Depression. The Fed would surely have to reign in inflation, so it would raise interest rates to tighten control on borrowing. Understanding this as a casual investor, I figured interest rates for certificates of deposit would also improve from the lowest levels in my lifetime. Accordingly, I put my extra money in short-term, six month CDs so my investment wouldn’t be locked up while interest rates rose.

But this theory has since turned out to be wrong. Inflation has stayed extremely low, and the Fed has slashed interest rates to encourage borrowing and spending. Banks and credit unions, in turn, have dropped CD rates from measly to almost nonexistent.

I have a couple CDs due soon — extra money I don’t need during college — and I recently checked to see what rate I’d get if I renewed them. A 12-month CD is fetching interest of less than 1 percent at my chosen institutions. If you have $10,000 to invest, you’ll only get an extra $100 after a year at that rate.

Yikes.

The low rates are barely enough to cover the time and gas money it takes to go to one institution, withdraw your money, and take it elsewhere. So, I’ve decided I won’t be renewing my CDs. It’s going to give me an opportunity to explore index funds and mutual funds, which I’ve only dabbled in to this point.

My initial investments have done very well — I bought into mutual funds for the first time when the market bottomed in March 2009. Since then, the S&P 500 is up nearly 50 percent. But the gains won’t continue forever. If casual investors like me were to make investments now, we’d be too late to take advantage of that huge rebound.

Still, the economy has plenty of room to recover, so modest growth in mutual funds and stocks may continue. It’s no secret the stock market has historically outperformed other investment instruments (the October 2007-March 2009 slide as an exception). And, at this point, anything that covers the fund’s fee and still nets more than the awful CD rates would make me satisfied.

Not rich. Satisfied.

Theo Keith, a senior at the University of Missouri School of Journalism, is a SABEW/National Endowment for Financial Education fellow. He has had internships at Bloomberg News in Detroit and Fox News Channel’s “Your World with Neil Cavuto,” and he plans a career in business journalism.

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