Becoming Best Friends with Certificates of Deposit: Your Smartest Investment Move Right Now
So, have you heard of certificates of deposit, aka CDs? They may not seduce you like those shiny, risk-fraught stocks but boy are they a sturdy ride. Right now, these less glamorous yet undeniably secure guys are looking real good! Why is that you ask? The answer is simple: CDs are currently offering the highest interest rates we’ve seen in the last 20 years.
Who’s to thank for this? None other than our dear Federal Reserve, with its courageous stance against the inflation monster
Fed’s Battle, Your Gain
Now, let’s dive into the specifics. Have you been keeping an eye on the financial weather? If so, you may have noted that with the Fed’s series of interest rate uplifts, interest yields on CDs have soared to over 5% in 2023. And you thought 3% APY was a big deal!
However, our good friends at the Federal Reserve aren’t asleep at the wheel so hold onto your hats folks—we may be seeing some return-fire rate cuts pretty soon. That essentially means the window to benefit from these juicy APYs might be closing fast.
How do CDs work?
For those of you out of the loop, here’s how a CD works. Your dough earns a fixed interest rate over a given period—anywhere from three months to five years. Your earnings are based on where you bank and the length of your CD’s term. Before mid-2021, finding a CD offering a 3% APY was as rare as a unicorn sighting!
The Promised Yield: Upon Maturity of a CD
Stick with me now, we’re almost there. When your CD matures, you’ll get your original pile of cash back plus all its shiny new interest friends. For instance, a $10,000 stash tucked away into a one-year CD with a 5% APY grows to $10,500 in 12 months. Impressed yet?
Ally Bank’s portfolio manager, Frank Newman, let us in on an exciting little secret: CDs offer solid returns, often outrunning high-yield savings accounts. While they may not keep pace with potential gains in the stock or bond market, CDs can reduce your portfolio’s risk and bulk up your savings—especially if you pounce now before rates nosedive.
Should You Open a CD Right Now? That’s The Million Dollar Question…
When the Fed decides to raise rates, APYs usually follow suit. Understandably, banks need to cover their higher borrowing costs and so, they offer higher return rates on deposit products like CDs to incentivize customers to park their money with them.
The Fed set the benchmark rate at a heart-thumping 5.3% from August through November while inflation slowly ebbs away. Yet, inflation still looms large at 3.2%, just a tad above the 2% target and the Fed hasn’t blown the whistle to halt rate hikes just yet.
Just like how no one knows when the next rainstorm will hit, the timing for a drop in rates—and a consequent drop in APYs—is uncertain. Will it come in early 2024 or is May or June more likely? Pundits can’t agree on that one.
But one thing’s crystal clear—generous APYs like the ones on offer now are as elusive as humility in a peacock, and with the looming forecast of rate drops next year, golden opportunities like these might scurry away.
But, wait, don’t just rush off to open a CD account. Newman, the savvy finance guru he is, suggests doing some personal finance introspection first. CDs are great for many, but they aren’t one-size-fits-all. If your finances are as unique as you are, then consider blending in CDs with other investments tailored to your risk appetite and long-term financial aspirations.
“Since most CDs offer a fixed set-in-stone interest rate for a set duration, they’re a surefire safe bet during market fluctuations—and could offer a safety net against losses if the risky stock market nosedives,” Newman sagely points out.
A word of caution: Breaking a CD prematurely can give your finances a pinch with penalties. Consider how soon you’ll need your stash. If soonish, perhaps a liquid option like a high-yield savings account or a money market account is a better fit for you—always check the penalties before marching ahead!
Feast Your Eyes: CDs With APYs over 5%
Get ready to be spoiled with choice as numerous banks and credit unions have CDs advertised with APYs over 5%. Start rummaging local institutions to uncover high-yield CDs unique to your region.
Here are a few suggest CD options offering APYs of 5% or higher:
- Marcus by Goldman Sachs: 6 to 18-month CD (5.30% APY)
- Western Alliance Bank: 3 to 12-month CD (5.51%-5.70% APY)
- Sallie Mae Bank: 12 to 18-month CD (5.25-5.55% APY)
- Synchrony Bank: 9-month CD (5.50% APY)
- Barclays: 12 to 24-month CD (4.15 and 3.00% APY)
- Everbank: 9 to 12-month CD (5.0-5.50% APY)
- Ally: 6 to 18-month CD (5.0-5.15% APY)
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