Years ago, it wasn’t unusual to find CDs with rates of at least 5 or 6 percent. However, those days are long gone and most CDs today are unlikely to yield more than 2 percent. While this may sound discouraging, they’re still higher than those of most savings accounts. If you’re willing to look around, you can still find one that will help you make the most of your money. Here are some things to consider.
It always helps to have some understanding of the various factors that help determine the rates on CDs. To begin with, all rates are heavily influenced by what’s going on in the market. When the Federal Reserve decides to either raise or lower its benchmark rate, one of its most important goals is to encourage the circulation of money. This is best accomplished by encouraging borrowing, since borrowers need the money for things like houses and cars. Since lower interest rates favor borrowers, savers are often left disappointed.
Another important factor is the length of time you’re willing to lock your money away. Because of the penalty for early withdrawal, you have to think carefully about how likely you are to need these funds in the near future. CDs that mature in five years or more are likely to have better yields than one or two-year CDs.
The size of your deposit comes into play, as well. If you’re being offered a CD without a minimum deposit, it probably won’t have a very high yield. Some of the best rates are offered by banks with CDs that require $10,000 minimums.
Local and Online Banks
When you start shopping around for the best rates, keep in mind that community banks, local credit unions, and online banks will have more to offer. Since online banks lack the overhead associated with brick-and-mortar institutions, they’re able to provide higher yields to their customers. Another advantage of online banks is that virtually everyone has access to them, regardless of where they’re located. Since you’re not limited to your own geographical area, it’s possible to find a great rate at an institution based in another state.
Local institutions often compete against online banks. The result is that they try harder to attract customers with lower minimum deposits and higher rates. Keep in mind that you’re also more likely to get the kind of personal service at a local bank or credit union that you would be hard-pressed to find at a national bank. That could lead to better offers, in terms of investment products like CDs.
Ladder, Barbell, and Bullet Strategies
There are also a couple of diversification strategies you might want to consider, as well. Laddering involves dividing your total investment, so you can invest the portions into multiple CDs that mature at different times, rather than investing a lump sum into a single CD. In a laddering scenario, you could hypothetically invest equal amounts into one, two, three, four, and five-year CDs. When the one-year CD matures, you can withdraw the cash and interest without penalty and reinvest it into a five-year product with a better rate. If you do this each year with the two, three, and four-year products, you’ll eventually have a portfolio of five-year CDs that mature one year after another.
The barbell strategy is similar to laddering, but is for investors that are more interested in short and long-term yields, leaving out the ones in between. This would entail dividing your money into three or six-month CDs, alongside those that mature in five years or more. Essentially, you’ll have short-term access to some of your funds, with the option of reinvesting in either more short-term CDs when they mature, or into longer-term products, depending on which interest rates are more favorable at the time.
The bullet strategy is for an investor with a specific financial goal. It’s also suitable for savvy investors with a good feel for when interest rates are likely to rise. In this scenario, you would invest in multiple CDs with different terms and a goal of having them mature simultaneously. An example would be starting out with a five-year CD, then purchasing some three-year CDs in two years, followed by some one-year CDs in four years. At the end of five years, all of your CDs would mature in time to use the money for whatever purpose you might have had in mind when you began the process.
While it’s true that it used to be easier to find good rates on CD, it’s far from being impossible. It comes down to thinking strategically and being aware of how much cash you can afford to lock away, for how long. Remember that if you can learn to approach investing in this way now, while interest rates are low, you’ll be even better positioned for when they go back up.