How savers can ride up with CD rates

Go short, young man. OK, so that's not exactly what Horace Greeley said. But it's good advice for people who want to get the most out of their savings right now.

Higher interest rates make it harder for people to buy homes and cars and more expensive for businesses to borrow. But they're also making it more rewarding to sock money away in savings accounts.

More rewards may be coming along just in time. Thanks mainly to higher consumer spending, the personal savings rate in the United States is expected to drop this year to its lowest level since 1947. Consumer spending, in fact, helped by consumer borrowing, has been a major prop under the economy for the last five years.

But what if that prop slips? What if people decide they want to save more? Where will the money go?

Some of it will probably go back into savings accounts at banks and savings and loans. There, customers will be happy to find that interest rates on savings accounts, money market deposit accounts, and certificates of deposit (CDs) are higher than they have been for some time.

Savings rates have been moving up for several weeks now with no one quite sure how high they will go. In only one week recently, CD rates jumped about 1 percent. This was particularly noticeable in big cities, where competition for savers' dollars is more intense.

``Banks are going to the cheaper consumer market for funds instead of the wholesale market,'' says Robert Heady, publisher of 100 Highest Yields, a North Palm Beach, Fla., newsletter. Interest rates on the bond and mortgage markets are all going up faster than CD rates, so if banks can attract deposits with these certificates, it saves them money.

Once wholesale rates start down again, the banks will return to those markets for funds, Mr. Heady says. So rate-watchers who want to know when to lock in a longer maturity on CDs should keep an eye on mortgage rates. When these have fallen for a few weeks in a row, that's probably a sign that savings rates have stopped going up, too.

For now, ``going short'' is the best strategy. This is no time to be buying five-year, 2-year, and probably not even one-year CDs, which lock in your money at a rate that might seem puny a few weeks or months from now.

It is a time to be checking the maturity dates on the CDs you currently own, and checking the bank's policy about rolling them over into new certificates, and considering some of the shorter-term alternatives.

One of these alternatives came along at the end of 1982. The money market deposit account (MMDA) was supposed to help banks compete with money market mutual funds.

MMDAs do compete with money market funds - sort of. Their rates are changed frequently to reflect current interest rate conditions, but unlike money funds, where the rates are changed every day, banks only update their rates weekly or monthly. When rates are falling, this is great. MMDAs tend to be very close to, or even above, money funds.

But with rates increasing, the banks just can't keep up. These days, they're more apt to be lagging the mutual funds. The national average yield on MMDAs is 5.48 percent, Heady says. Meanwhile, the seven-day average yield on money funds is 5.62, according to the Donoghue Organization in Holliston, Mass. The bank offerings do come with federal deposit insurance, of course, so if you sleep better with that extra protection, stick with the MMDAs.

The next shortest instrument is the six-month CD. The average yield on these is 6.33 percent, Heady says. In some cities, they're paying more than 7 percent. Six months is the longest maturity anyone should be getting, he believes, though for now he prefers the MMDA.

``For the next three or four weeks, you should park your money in a nice, safe, no-penalty-for-early-withdrawal money market account,'' he recommends.

If you do decide on a CD - no matter what the maturity or the current interest rate situation - always look for a bank with the most frequent compounding schedule. Many banks and savings and loans still only compound interest on a weekly, monthly, or even yearly basis. If you really want to see your money to make more money, look for an institution that compounds interest at least every day.

A few banks have ``constant compounding'' and while this method does pay a slightly higher yield, it may not be worth chasing all over town to find one.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.