Consider opening a certificate of deposit now as the Federal Reserve has recently lowered its benchmark interest rate by a quarter-point for the third consecutive time this year. This has resulted in a full percentage point decrease since September, signaling potential changes in CD rates. Today may mark the end of CDs offering over a 4% annual percentage yield (APY) for the foreseeable future.
One advantage of CDs is their fixed rates, making them a reliable option amid anticipated interest rate drops. While CDs provide a safe way to earn interest, they may not suit everyone’s needs. Evaluate your options carefully, especially if you anticipate needing access to your funds before the CD matures.
The federal funds rate set by the Federal Reserve impacts interest rates across financial institutions, including CD rates. Banks adjust their lending rates based on the Fed rate, which in turn affects consumer rates, such as those for mortgages and car loans. Higher Fed rates lead to increased interest charges on debts but also result in higher returns on products like CDs and high-yield savings accounts.
Investing in a CD now could be beneficial, particularly if you are saving for a future goal or retirement. CDs are FDIC-insured and offer predictable returns that remain constant throughout the term. With inflation on a downward trend and Fed rate cuts projected, opening a CD at the current high rates is advantageous. Rates are expected to remain steady, making this an opportune time to secure a higher rate of return.
CD rates are currently at their peak, with the potential for further rate cuts in the future. By locking in a CD now, you ensure a fixed rate of return until maturity, regardless of market fluctuations. This stability allows for better financial planning, as you know exactly how much you will earn when the CD matures. In contrast, high-yield savings accounts have variable rates that can change over time.
It’s hard to make accurate predictions beyond a year, especially when unexpected events can disrupt forecasts, prompting the Federal Reserve to intervene to stabilize or stimulate the economy. Comparing APYs to retirement portfolios, such as 401(k)s, typically yield between 5% and 8% annually, depending on market conditions. For those nearing retirement or already retired, allocating some savings into a Certificate of Deposit (CD) can offer security with guaranteed returns, irrespective of market volatility.
Utilizing a CD ladder strategy can maximize high bank yields on terms up to 24 months. Rather than investing $10,000 in a single 24-month CD, consider spreading $2,500 across four CDs with varying maturity periods (6, 9, 12, and 24 months). As each CD matures, you can reinvest or wait for better rates. CD laddering also enables you to seize high-rate promotions and access funds without penalties before the longest term ends.
Apart from CDs, high-yield savings accounts (HYSA) can yield comparable short-term returns without withdrawal fees. Contributing regularly to an HYSA capitalizes on compounding interest. Money market accounts offer a middle ground between CDs and HYSAs, providing higher yields than traditional savings accounts with check-writing privileges. While higher-risk investments like index funds, mutual funds, and stocks may offer greater returns, they carry increased financial risk. Treasury bills represent a low-risk investment option akin to competitive CDs available today.
Understanding how CDs function is essential. These deposit accounts lock funds for a fixed period and pay out interest. Interest accrues on both the principal and earned interest, paid out monthly, quarterly, or annually. Upon maturity, you receive your initial deposit and interest, which can be renewed or transferred. CD rates are linked to the Federal Reserve rate, which has risen 11 times from March 2022 to July 2023. Prior to this, the national 12-month CD rate was at 0.15%.
The interest rate has increased more than twelvefold since — and despite three consecutive Fed rate cuts since September 2024, you can still find Annual Percentage Yields (APYs) ranging from 3.5% to 4% or more. Compare today’s most competitive Certificate of Deposit (CD) rates to the national average rates on a $10,000 minimum deposit between November and December 2024, as reported by the FDIC.
CD Term | National Deposit Rate on December 16, 2024 | National Deposit Rate on November 18, 2024 | Month-over-Month Change in Rate
1-month CD: 0.23% (No Change)
3-month CD: 1.50% (Down 2 basis points)
6-month CD: 1.65% (Down 3 basis points)
12-month CD: 1.83% (Down 1 basis point)
24-month (2 years) CD: 1.52% (No Change)
36-month (3 years) CD: 1.33% (Down 2 basis points)
48-month (4 years) CD: 1.24% (Down 3 basis points)
60-month (5 years) CD: 1.32% (Down 3 basis points)
Is my money safe with an online-only bank like Lending Club or SoFi? Yes. Online-only banks and digital accounts are as safe as traditional banks as they are either FDIC-insured chartered banks or partner with well-known banks to offer protected deposit accounts. Look for terms like “member FDIC,” “FDIC insured,” or “NCUA insured” when comparing options.
What is a jumbo CD? A jumbo CD requires a minimum of $100,000 to open the account and offers a fixed interest rate and term. In the current high-interest rate environment, jumbo CDs may not always offer higher rates than traditional CDs, so it’s important to compare before investing.
What is a no-penalty CD? A no-penalty CD, also known as a liquid CD, allows you to withdraw your money before the maturity date without facing penalties. While this offers flexibility, it may come with lower rates compared to traditional CDs. Consider your deposit amount, access needs, and savings goals to decide between a no-penalty CD and a high-yield savings account.
Brokered CDs vs. Traditional CDs: Understanding the Difference
When it comes to saving and investing, certificates of deposit (CDs) and savings accounts are popular choices. But what exactly is a brokered CD, and how does it differ from the more familiar bank-issued CD?
A brokered CD is essentially a certificate of deposit that is purchased through a brokerage firm, as opposed to directly from a bank or credit union. Similar to traditional CDs, brokered CDs offer a fixed interest rate over a specific term length chosen by the investor. However, one key distinction lies in the method of purchase – brokered CDs are bought and sold through investment accounts, allowing investors the option to acquire them either new or “used” from other investors.
Before delving into the realm of brokered CDs, it is crucial to understand the nuances associated with this investment vehicle. While traditional CDs are straightforward in their acquisition process, brokered CDs offer a more dynamic approach, enabling investors to access a broader market and potentially secure better rates.
The decision to invest in a brokered CD warrants careful consideration, especially for those exploring this option for the first time. Understanding the benefits and drawbacks, as well as the potential risks involved, is essential in making an informed investment choice.
Emergency Funds: Determining the Right Amount
Building an emergency fund is a cornerstone of financial planning, providing a safety net in times of unexpected financial strain. The question of how much to allocate to an emergency fund is a common dilemma faced by many individuals seeking to fortify their financial security.
While financial experts often recommend starting with a minimum of $1,000 for an emergency fund, the ideal amount may vary depending on individual circumstances. A popular guideline suggests setting aside an emergency fund equivalent to half of one’s monthly expenses, ensuring a buffer for unforeseen expenses or income disruptions.
For those with stable employment and financial responsibilities, such as being the primary breadwinner in a household, a more substantial emergency fund ranging from three to six months’ worth of expenses is often advised. This extended safety net can offer greater peace of mind and financial stability in the event of job loss or other unforeseen circumstances.
Maintaining an emergency fund requires discipline and strategic planning, ensuring that funds are easily accessible yet separate from daily spending accounts. By adhering to prudent financial practices and regularly assessing and adjusting emergency fund contributions, individuals can cultivate a robust financial cushion to weather unexpected financial storms.
Sources of Information
To navigate the ever-evolving landscape of finance and investment, reliable sources of information play a crucial role in guiding informed decision-making. References such as the Consumer Price Index Summary provided by the U.S. Bureau of Labor and Statistics offer valuable insights into economic trends and indicators, aiding individuals in understanding the broader financial landscape.
Furthermore, resources such as the National Rates and Rate Caps data from the Federal Deposit Insurance Corporation (FDIC) serve as essential references for individuals seeking to stay informed about prevailing interest rates and regulatory measures impacting their financial holdings.
