Saving in a low-yield world
5 savings strategies before CD rates rise

Consider adjustable-rate CDs

Some financial institutions have introduced adjustable-rate CDs that allow customers in rising-rate environments to increase their rate one or two times without extending the maturity of the CD. Some lenders refer to these CDs by other names, such as "bump-up" CDs.

For example, a consumer with a three-year adjustable-rate CD that currently has an annual percentage yield of 1.4 percent might be allowed to increase the rate up to 2 percent. An additional deposit into the CD can also be made when the rate is adjusted.

The downside of adjustable-rate CDs is that their rate of return typically is a bit lower than a regular CD.

"What you're betting on is that the interest rate will go up, and nobody has a crystal ball," says Joseph "J.J." Montanaro, a Certified Financial Planner for USAA, a San Antonio-based company that offers these products designed to fight inflation.

“People have to be wary about trying to stretch to get yield.”

Adjustable-rate CDs and traditional CDs are catching on as people shy away from the stock market, Montanaro says. "The popularity of CDs has increased pretty dramatically."

USAA won't divulge specific numbers, but the company says its seen a double-digit increase in the sale of adjustable-rate CDs since the beginning of the year.

Build a CD ladder

Another way consumers can prepare themselves for that inevitable rate rise is to divide their savings into smaller pieces and invest those in a variety of CDs with staggered maturation dates. This concept is known as CD laddering.

A consumer following a laddering strategy might put $1,000 in a three-month CD; another $1,000 in a six-month CD; $1,000 more in a nine-month CD; and the final $1,000 in a 12-month CD.

As each CD matures, the initial investment -- plus interest -- is reinvested for a year as the part of a "ladder" of investments.

"It's kind of like a little conveyor belt," says Anthony Diaz, vice president of investments at IFC Advisory in Culver City, Calif.

Look into TIPS

Rising interest rates often occur in tandem with rising fears of inflation. Today's increasing deficits and expanded money supply may make inflation more likely in the near future.

Savers who seek protection from the inflation often associated with higher rates may want to consider investing in Treasury Inflation-Protected Securities, or TIPS. Their principal rises with inflation or falls with deflation, and at maturity, the holder is paid the adjusted principal or original principal -- whichever is greater -- and interest is paid twice a year.

"Right now they're far better than Treasury bills or bonds," says Carol Fabbri, managing partner of Fair Advisors in Denver, who believes TIPS are a better bet in the current environment because they are guaranteed to keep pace with inflation.

TIPS are sold at auction by the government four times a year in $100 allotments, or can be purchased on the secondary market at any time through banks and brokers.

Fabbri says she sees no drawbacks to TIPS.

"The downside protection is built into it," she says. "There really is no downside other than a little bit of complexity."


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