As we begin May, the shifting interest rate environment might be calling for a more nuanced CD strategy.
If interest rates are expected to fall — which has been the consensus among policymakers and experts for much of 2024 — now might be the time to get long-term CDs, as you can earn at today’s high rates for longer periods. However, if inflation remains sticky, high interest rates could remain in place longer than most of us expected. If that’s the case, it might make sense to get short-term CDs, to see how the interest rate environment plays out in the near term.
The best CD strategy for this month might be to invest in several different kinds of CDs, not just one term or type. Yes, this can mean building a CD ladder. But, as I’ll explain below, it can also mean getting the best CDs that cover all your bases. Let’s take a look at what I mean.
Look for high-yield CDs that serve different functions
CDs come in different types. Most of us are familiar with the traditional bank CD, which locks your money up for the length of your term in exchange for a fixed interest rate. These CDs charge penalties for liquidating your account early, but may let you withdraw interest penalty-free throughout your term (though doing so will slightly reduce your CD’s APY). Since high-yield versions of this CD make up the most lucrative rates on the market, these CDs often form the backbone to a good CD strategy.
Branching off from the traditional bank CD is the no-penalty CD. As the name suggests, these CDs don’t impose a penalty for early withdrawals. In a way, they’re like the glass-breaking hammers you often see on trains (“break in case of an emergency”). If you need the savings in your account, you can “break the glass” without paying a penalty. This could work well if you notice CD rates are starting to rise again: You could exit your CD contract and reinvest your money in a more lucrative term.
Traditionally, no-penalty CDs have lower rates than standard CDs with the same term. This isn’t the case, however, if you get your CD on the savings platform Raisin. Right now, Raisin offers several no-penalty CDs that pay above 5% (as of May 1, 2024, the highest rate is 5.15%). This gives you the best of both worlds: high yield and an escape hammer.
Brokered CDs are also really interesting right now. These CDs are offered through brokerage accounts, like Fidelity, Charles Schwab, and Edward Jones. Like bank CDs, brokered CDs are FDIC insured and pay a set interest rate. However, like bonds, brokered CDs can be sold on a secondary market. For example, if you invest $1,000 in a 9-month Edward Jones CD with a 5.35% rate, you might stand to benefit if 9-month CDs drop to 4.95% a few months later.
Build a CD ladder with different terms and types
For most people, the best CD strategy is to build a CD ladder. This involves staggering CD terms to increase access to your funds. For example, you could open a 3-month CD, 6-month CD, 1-year CD, 2-year CD, and 3-year CD.
Now, to cover all your bases, consider adding no-penalty and brokered CDs to this ladder. For example, you could have a 5-month no-penalty CD and 18-month brokered CD. Both would earn high interest, but could help you capitalize on unexpected rate changes. For example, if CD rates start climbing higher, the no-penalty CD would let you cancel your contract without repercussions. Likewise, if rates dropped substantially, selling a brokered CD on a secondary market could result in profits.
That said, there are some CD types I wouldn’t recommend. Bump-up CDs, for example, could also capture rising interest rates. But these CDs don’t often have competitive APYs, at least not compared to no-penalty or traditional CDs. Likewise, there are CDs that track the stock market and others that invest in foreign currencies. These might be lucrative for some investors, but they’re complicated to use and would require more knowledge than your traditional bank CD.
All things considered, CDs are paying out at great rates in May 2024. While you could deposit all your savings into one or two CD accounts, you might get stronger net returns by diversifying your CDs. Take a look at some of the best CD rates on the market today and start building a ladder that works for you.
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