Low certificate of deposit rates are mainly due to the Federal Reserve Bank lowering the Federal Funds Rate (the interest rate which banks lend their funds deposited at the Federal Reserve to other banks usually overnight) to historic lows. The current Federal Funds Rate is targeted between 0% and 0.25%. Also contributing to the low deposit rates on certificate of deposits and savings accounts is the Troubled Asset Relief Program (TARP). Banks are funding their reserves by participating in TARP so they have less of a need to lure depositors with those special high interest promotional CD rates.



Although there are banks and financial institutions that offer higher than average rates, they are few. The low rates shouldn't deter one from investing in CDs as the current financial turmoil make CDs a safe investment. What else can offer your money a Federal Deposit Insurance Corporation guarantee of up to $250,000?

The best way to beat the low rates is not to invest in long term CD's with low interest rates, but by CD laddering. Laddering CDs allows you take advantage of interest rates spread on a number of months or even years. If you notice, the high rates are offered on long term CDs. For example, First Command Bank is offering a rate of 3.93% for balance of $10,000 on a 12 month CD and the APY is 4.00%. This is way above the average 2.00%.

This technique also provides the much needed liquidity which is very important in these difficult financial times. It also gives you a piece of mind as you don't have to worry about when CD rates are going up or down as you'll only be investing a portion of your savings.

CD laddering involves dividing your savings in to several “ladder rungs” and placing it in CDs each with progressive terms. Each CD is a rung. You decide how much you have to apportion each rung. First you have to determine how much you'll be investing. You can set up a CD ladder for as long or as short as you like, but as an example let's consider a three-year ladder with three rungs. Ideally, it's best to keep a ladder short, that is, you could have a three, six and nine month terms but for this example let's consider years.

If you have $15,000, you can invest $5,000 in a one-year CD, $5,000 in a two-year CD and the remaining in a three-year CD.

After a year the magic starts, the one-year CD matures and each of the other CDs has one year less until maturity. In short, the two-year CD now matures in one-year; the three-year is two years from maturity. The money from the matured one-year CD is now invested again on a three-year CD. So what actually happens is, every year each rung in the ladder is vacated and filled. You never run out of rungs as it is cyclic in nature.

However take in account that CD laddering works best when you don't have any emergency expenses. So before investing in CD laddering always apportion a separate emergency fund. CDs have penalties for early withdrawal that will cost you a lot.