One of the ways to invest money is to put it in a bank CD or savings account. With the economy in such bad shape and interest rates so low though, you might not really notice that CD's always pay more than your savings account at the bank. So, why are CD interest rates always higher than savings account rates? One of the ways a bank makes money is by loaning it to others. They take your money, give you a small interest rate, and then turn around and loan it to someone else at a higher rate. They make their money in the difference of what they are paying you for the money and what they are getting to loan it back out.

Banks get some of the money they have to loan from CD's or certificate of deposits. You can get a CD for different time periods such as 6 months, one year, two years, 5 years and up. When you buy a 2 year bank CD, the bank knows it has your money for two years. Likewise, it your get a CD for 5 years, they know they have 5 years to do whatever they want with your money. A bank is willing to reward you with the best CD rates if you are willing to loan them the money for longer periods of time.

Savings accounts are different from certificate of deposits and in many cases not much different than a checking account minus the checks. You put money in but you can take it out at any time with no penalty. Many people put money in and then take it out of their saving several times a month. That being said, the bank cannot loan the money out in savings accounts as easily because it is not locked in. For this, they are willing to give you some interest on your money but not near as much as with a CD because they have no guarantee you will not take the money out. That is why the best CD rates will always be found on the longest term CD's and saving accounts will never pay very much interest.


CD interest rates are very low right now but take a look at what US Treasury notes are paying. The chart below shows that you will get less than a half percent for a 12 month note and ONLY 3.58% for 30 years! Are you kidding me? Who is crazy enough to loan the government money for 30 years at 3.58%?

This is an unreal situation that puts anyone with money in a real quandry. US Treasurys have for years been the one place you could put big chunks of money and not worry about it. With bank CD's you always had the $100,000 cap at being guaranteed through FDIC and so if you had a lot more than that you had to put your money in CD's in multiple banks. Having money in many banks is a real hassle and by buying US Treasuries it was easy to not have to do that.

Now that the interest rates for US Treasuries are practically nothing, what do people do? I know I would not loan the US government money at those low rates just out of principle alone and there is no amount of finance advice that would ever persuade me to. There is no way I would give my money to Uncle Sam for a half a percent for a year. That is pretty much the same as loaning them money at no interest as far as I am concerned. The best CD rates you can find are still better than that and so now is the time to start looking I guess.

This again impresses upon you how damaging this recession is to older retired people who count on their interest income for their retirement. Anyone with any money to invest now is faced with getting almost zero return. Additionally, if you do have enough to make any money, Obama will surely be raising the interest income tax rates. Why even bother investing anymore?