The Certificate of Deposit

There are many other saving tools around with much higher interest rates and fewer time restrictions. Still, CDs manage to be a viable option for saving because of their nature. Anyone can invest with them because the only real restrictions are time and the amount. CDs normally take a specific amount of cash that’s placed into the account and accrues interest over the length of the investment. Three, six and nine-month long CDs are the most common but there are also longer-lasting CDs that offer higher interest rates of return. Though those rates are “higher,” they are still only an average 2.91% on a 5-year CD, with shorter-term investments capping out at around 0.9%.

Low interest CDs

The lowest rate CDs, or short-term ones, are the ones currently being scrutinized. According to a recent Bankrate.com survey, people who are ridding themselves of their low-interest rate CDs are paying a lot more than they originally bargained for. In fact, most financial institutions today hike up the cost of early withdrawal penalties. Of the financial institutions surveyed, 92% of them not only charge an early-termination fee, but also take costs out of the principle to cover any additional fees they need to cover.

How the fees add up

The Bankrate.com survey showed some interesting facts on financial institutions and CDs that are withdrawn early. Research shows that the withdrawal penalty for a CD is normally equal to about six months’ worth of interest. That number isn’t consistent though, and investors are warned to be aware of how their money is going to be allocated if they withdraw it prematurely. For example, Presidential FSB bank in Washington, D.C. has a return of 2.5%. If a consumer withdraws it early he or she can expect to pay 24-month’s worth of interest in penalty charges. If their CD is valued at over $10,000, then the penalty for early withdrawal is $506.25. For consumers who are trying to make the most of their quick cash by investing it, the early withdrawal costs of a CD may thwart their plan.

Think about investments long-term

Some CD investors of the past signed up their money for longer periods of time to take advantage of the higher interest rate return. This used to be a good idea, but now that financial institutions are shoring up their rules and regulations for the sake of bigger returns, it isn’t as useful an option as it once was. In particular investors who know they will need money sooner may find the technique of signing up for a higher-interest CD counterproductive.

According to financial experts, however, there is a solution. Investors should stop looking at the bigger return of long-term CDs and opt for CDs with a more realistic length. Accounts with more favorable maturity dates come with lower interest, but investors can then reinvest them once they come due. The added benefit is that the market is on the upswing, so that means insurance rates will be going up, too.

Investing money post-recession

Banks are harder on investors these days. After weathering the recession, financial institutions are making their rules more difficult to cut back on losses. Despite changes, though, there are still ways to manage. Consumers need to assess their individual needs and then choose the right savings vehicle accordingly. CDs are still viable savings tools, but need to be maneuvered wisely to maximize fast cash for the future.

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Consumers are lacking quick cash options now that lenders are working with stricter rules. Prior to the recession, lenders were handing out loans to sub-prime borrowers. There were few restrictions and the loan products available were vast. Almost every applicant could find some loan company to provide the credit needed. Unfortunately, though it put many Americans into homes, it did little to assure that they had the ability to repay the funds. That’s what caused the lending crash and partially fueled the recession of 2008/2009.

The change in consumers

The hard choice that many Americans are being forced to make is whether to pay their credit card bills or their mortgages. It may sound unfathomable and a few years ago, it was. But in today’s tough financial times there are a growing number of consumers who are opting to pay down debt on credit cards. According to a TransUnion study, the percentage of Americans who are current on credit card payments but behind on their mortgages is increasing. In fact, it increased to 6.6% at the end of 2009 and that is up from just 4.3% at the beginning of the year. For those who are current on mortgages and late on credit cards, the data is opposite. At the end of last year that rate was at 3.6%, which is up from 4.1% one year prior.

What the numbers mean

The change in numbers is telling of where consumers are now that they have been through a recession. There was a time when the common perception was that any homeowner would do whatever it took to pay a monthly mortgage payment, even falling back on other bills as a result. Today’s homeowner isn’t following the same model. Experts are attributing the shift to home values. When the housing market bubble burst at the beginning of the recession, borrowers watched their home’s value decline. Some declined up to 40%, and that left them with “underwater” mortgages.

An underwater mortgage is a condition where the borrower owes more than their home is worth. Knowing they were underwater left many consumers with changing priorities. They believe that if they owe more than the home is worth, it may not be as important to make a mortgage payment on time. Rather, they use their quick cash to pay down debt. A study done by RealtyTrac showed that in today’s market, about 25% of homeowners are in the underwater position with their mortgages. The common feeling is what is the purpose of putting money into an asset that is just losing value—value that it most likely will never regain?

The lending bubble’s aftereffect

Another problem the lending crash created was a market that isn’t personally invested in their property. In former years, consumers had to put 10 to 20% down on a property. It helped to psychologically bond them to the property because of their upfront investment. During the lending spurt, consumers were allowed to buy properties with little to nothing down. That meant that there is no personal investment. Add to that the huge number of foreclosures and the loss of property just isn’t as scary sounding as it once was.

In lieu of the long-term investment

More and more consumers are joining the ranks of those prioritizing paying off credit cards, rather than mortgage payments. The reason can be attributed to a huge paradigm shift in the market since the recession. Consumers want quick cash options and credit cards offer that, not homes. Americans seem more focused on having ways to afford everyday expenses like food, gas and clothes than on long-term commitments.

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As long as they're OK, consider installment loans for your business's short-term financial needs. (Photo: flickr.com)

Small businesses are looking to installment loans rather than stocks for funding options. Before the recession, many small businesses were investing in the stock market, trading for added revenues. Dallas-area financial planner Chance Woods stated his clients have a “mixed feeling of relief at stock gains since March, and are reluctant to fully commit to the market.” Research is showing that most small business owners are feeling the same hesitation. The financial hit many of them took due to last years’ recession is having a huge effect on their confidence to move towards stock investing again.

Woods added, “People have been on an emotional roller coaster over the last two years, so they’re not quite ready to say, ‘I’m all in’…it’s going to take some time for them to recover and a lot less market volatility than we’ve seen.”

Alternative Investing

Although alternatives to stocks like money-markets and savings accounts were popular, it seems now that the return on investment is so low, business owners are hesitant there, too. According to Bankrate.com, the current rates for both modes of investments average about 1.5 percent around the country.  Seeing the lackluster interest rate, many business owners are opting for immediate installment loan options rather than wait out slow and minimal returns of other investing vehicles.

A Case in Point

Donnie Griffin, owner of a management consulting firm in Palm Springs, California, invested his money wisely. However, when the recession hit hard, he sold a good portion of his $250,000 portfolio. One week later, the stocks saw their biggest gain throughout the recession period. Griffin agreed he had “unfortunate timing” in his decision, but he also said that he wouldn’t venture back into the stock investing market easily. “Once you make a decision I think you’ve got to just ride it out… having experienced this drop, I’m better experienced for the next time one comes around.”

Griffin is not alone. As a business owner, his sentiments are shared nationwide. Many people lost a lot of money in stocks during the down economy. Although Griffin is patient, a lot of others aren’t. They want a more solid way of guaranteed money. Installment loans for a lot of qualified small business owners are proving to be that option. These types of loans are quick and simple for the qualified applicant. They potentially can bring money in when small business owners need it most. Rather than wait out a long-term investment and then reap only a small to moderate return, business owners are more confident in alternative types of loans.

No Guarantees on the Market

The most difficult thing for investors is that there is never a guarantee of market growth. The market is volatile and may take another turn for the worse. Robert Haley of Advanced Wealth Management stated, “It’s a gamble to hold and not sell now, and it’s a gamble to go all-in.” He believes that the way to mitigate the gamble is to build a long-term portfolio, but not rely on it for immediate funding. His belief is that a portfolio is never for immediate (or even moderate-term) funding. A better option may be immediate installment loans, or assets that are quickly liquidated. These are the types of funds that small business owners should have readily available for times of trouble.