(MoneyWatch) If your cash is sitting in the bank earning a whopping 0.01 percent annual percentage yield (APY), now is the time to get it working harder for you. Without having to put it in stocks or even bonds, you can earn money no matter what happens to interest rates. The secret is finding CDs that have two key ingredients:
Higher interest rates
Low early withdrawal penalties
DepostAccounts.com just updated its search for such CDs, and founder Ken Tumin alerted me of the findings. The contenders are Discover Bank, Pentagon Federal Credit Union (PenFed), Ally Bank, and Barclays. In the chart below, Discover Old refers to the nine month penalty for CDs opened on or before March 14, while Discover New shows the new penalty of 15 months that will take effect for CDs opened on March 15 or later.
If you think either that rates are going up soon or that you may need the money in the next few years, Ally and Barclays are probably your best bet. Beyond five years, Discover or PenFed are likely to do better.
These CD's have benefits over bonds and bond funds. For example, a superb bond fund like the Vanguard Total Bond Fund Admiral (VBTLX) that is yielding 1.71 percent, would decline by about 5.3 percent if interest rates rose by one percent. The Barclays CD actually yields a greater amount at 1.85 percent, but the real beauty of it is revealed if rates rise. Rather than take the 5.3 percent hit in the bond fund, paying the Barclays early withdrawal fee amounts to only 0.62 percent. So you'd pay a 0.62 percent penalty to be able to have your cash earn an extra one percent annually.
It's important to note that some financial institutions do not allow partial early withdrawals. The simple solution is to open multiple CDs. So stashing $50,000 might involve opening up 10 $5,000 CDs. That way, if you needed $4,000 cash, you could just close one CD.
In case you think these rates are hardly worth it, consider that the Barclays CD will return the following, even if cancelled in one year:
$10,000 CD - $138 interest
$50,000 CD - $690 interest
$100,000 CD - $1,380 interest
I often reframe the decision to clients by asking them if they would sell me an hour of their time for $1,380, because that's the time it would take to open and fund the CD.
To learn more about these CDs, see this post at DepositAccounts.com. When investing in a CD, remember to read the fine print, and be sure your financial institution doesn't reserve the right to retroactively change terms on your existing CD. Never go above FDIC or NCUA insurance limits.
Finally, if you don't want to open these CDs, at least move your money to a money market account paying about one percent. DepositAccounts.com lists high paying money markets as well.