"How to Use Certificates of Deposit and Savings Certificates"

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So what good are certificates of deposits to income investors?

Let's face it -- savings certificates are probably the investment of choice among millions of current retirees. Whatever money they have saved up, they keep it in savings certificates and automatically rollover the balances.

Bank Certificates of Deposit Offer Safety of Principal

They also give you a yield that's higher than passbook savings account and can be competitive with money market funds and Treasury bonds

If you are retired and don't mind giving up access to your money -- because you're scared to death of spending principal, because you're no longer working -- you don't mind the lack of liquidity.

It's a good deal for you to give up the liquidity for a higher yield.

Of course, you must also understand that your purchasing power is gradually going downhill due to inflation.

Income from Bank Savings Certificates Can Grow With Time

If interest rates prevailing in the economy go up, then you'll receive higher interest rate checks as your old savings certificates are rolled over into new ones.

However, since you have to wait for your CDs to mature, this can take time.

Also, it can work the other way -- interest rates can go down, taking your income down with them.

Also, although the dollar amount paid on your money in savings certificates can go up in time, they don't go up enough to compensate you for the loss of overall purchasing power.

Certificates of Deposits Therefore Do Not Count as Growth Income Investments

As I write this, I am wracking my mind to think of good reasons why anyone would want to take out certificates of deposit.

All I can come up with is a combination of risk-aversion and unwillingness to consider alternatives.

If you would not be able to sleep at night if your money was in anything that could reduce your principal (which can happen with both bonds and stocks), yet you don't plan to spend your principal, then you should take out savings certificates to maximize your income.

U.S. Treasuries Are a CD Alternative

You could get the same effect by buying U.S. Treasury bonds and holding them to maturity, but it's a lot easier and more convenient to go down to your local bank and take out a certificate of deposit

And especially if you're retired and especially if you bankroll is under $100,000.

And especially if you can live on the resulting income even if in the future it goes down.

Those of us who prefer maximizing purchasing power to an inflation-eroded number can do better.

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