February’s inflation rate decreased to 2.8%, which is good news for consumers wanting to maintain their purchasing power amidst rising prices. Savvy savers are turning to Certificates of Deposit (CDs) with yields of up to 4.75% APY as a way to combat inflation. These CDs offer returns that outpace inflation, making them a wise choice for safeguarding your money.
As the Federal Reserve prepares to meet next week, experts predict that interest rates will remain steady for now, but future cuts are likely. This is a prime opportunity to secure high CD rates before they potentially decrease. If you’re not keen on committing to a long-term CD, consider creating a CD ladder strategy, spreading your funds across multiple CDs with varying maturity dates to access your money periodically while still benefiting from current favorable rates.
For those interested in finding the best CD rates on terms of 7 months or longer, consider reputable online banks offering competitive rates with minimal deposit requirements. Some top options include Bread Financial Savings CDs at 4.50% APY for a 6-month term, Valley Bank Online CD offering up to 4.30% APY with a $25,000 minimum deposit, and Alliant Credit Union providing 4.25% APY on a 12-month term with a $1,000 minimum deposit.
By exploring these opportunities, you can make informed decisions to protect and grow your savings effectively.
The FDIC, an independent government agency, is responsible for maintaining stability and public confidence in the U.S. financial system and providing insurance on consumer deposit accounts. Here is a comparison of FDIC national deposit rates on a $10,000 minimum deposit between January and February 2025 for traditional low-interest deposit accounts:
Savings and deposit account:
– National deposit rate on February 18, 2025: 0.41%
– National deposit rate on January 23, 2025: 0.41%
– Month-over-month change: No change
Interest checking:
– National deposit rate on February 18, 2025: 0.07%
– National deposit rate on January 23, 2025: 0.07%
– Month-over-month change: No change
Money market:
– National deposit rate on February 18, 2025: 0.64%
– National deposit rate on January 23, 2025: 0.64%
– Month-over-month change: No change
1-month CD:
– National deposit rate on February 18, 2025: 0.22%
– National deposit rate on January 23, 2025: 0.23%
– Month-over-month change: Down 1 basis point
And so on for different CD terms. CD rates are influenced by the key interest rate set by the Federal Reserve, the central bank of the U.S. Typically, as the Fed rate rises, rates on deposit accounts and other financial products also increase.
After a series of rate changes, the Federal Reserve announced holding the federal funds target interest rate steady at a range of 4.25% to 4.50% on January 29, 2025, in an effort to tame inflation. The Fed’s decision was based on solid labor market conditions and stabilizing unemployment rates. The market expects the Fed to maintain the current rate during its next policy meeting in March 2025.
Recent data suggests a 97% likelihood that the Federal Reserve will maintain current interest rates. Economists are closely monitoring inflation and labor statistics, speculating on potential future adjustments to the Fed rate. Inflation has shown signs of stability, with rates hovering between 2.5% and 4% since May 2023 after peaking at 9.1% in June 2022. The most recent jobs report from the Bureau of Labor Services revealed a slight increase in unemployment to 4.1% in February, with 151,000 jobs added to payrolls, slightly below expectations but surpassing January’s figures. Despite concerns about geopolitical events affecting the economy, Federal Reserve Chair Jerome Powell remains optimistic, emphasizing the need for patience and clarity in decision-making. The upcoming inflation readings are eagerly anticipated for further insights into the economy’s health. The Federal Reserve’s rate-setting panel, led by Powell, will announce a decision on interest rates on Wednesday, March 19, 2025. For those considering investing in a certificate of deposit (CD), factors to compare include term length, rate of return, minimum deposit requirements, and the type of financial institution.
High-rate money market account with no withdrawal penalties
Life can be unpredictable, and there may come a time when you need to access your funds before your Certificate of Deposit (CD) reaches maturity. Early withdrawal penalties are usually calculated as a certain number of months’ worth of interest that you forfeit, such as 90 days of interest for CD terms up to 24 months. In general, the longer the CD term, the higher the penalty fee.
When is breaking a CD worth it? Insights from experts on early withdrawals and breaking even
Benefits of a Certificate of Deposit
1. Guaranteed returns: With a CD, you deposit your money and earn a fixed interest rate over the agreed term, which becomes yours once the CD matures.
2. Higher rates compared to traditional accounts: Many banks and financial institutions offer CDs with higher rates than what you would earn in an average savings or money market account. Digital and online banks typically offer the highest rates.
3. Range of CD terms: CDs are available for terms ranging from three months to five years or more, allowing you to align your investment with your financial objectives. Short-term CDs can yield higher returns than standard bank accounts, while longer terms offer rates similar to top high-yield savings accounts.
Drawbacks of a Certificate of Deposit
1. Early withdrawal penalties: If you need to access your funds before the CD matures, you may incur fees equivalent to several months’ worth of interest, typically ranging from three to six months, depending on your account and term.
2. Not the highest investment returns: While CDs provide a safe way to earn interest steadily, potential long-term earnings from stocks, bonds, mutual funds, annuities, or other securities may surpass those from CDs. Additionally, locking your money in a CD could mean missing out on potential increased average rates.
3. Inability to add more funds: Once your CD is locked, you cannot increase your balance until the CD matures. At that point, you can either transfer your funds to another account or roll them over into a new CD.
Exploring further: High-yield savings account vs. CD: Important considerations during periods of high rates
Alternatives to a Certificate of Deposit
While CDs offer a low-risk way to earn interest on your savings, there are other options available that provide safe and steady returns while allowing for flexibility in adding or withdrawing funds.
1. High-yield savings account (HYSA): These accounts offer the opportunity to grow your savings quickly at variable rates, often exceeding 5% APY, with no penalties for withdrawals.
2. Money market account (MMA): Also known as a money market savings account, an MMA can offer higher rates than traditional savings accounts while providing flexible access to your funds.
3. Higher-risk investments: Investing in stocks, index funds, and mutual funds through brokerage accounts and investment platforms can yield higher returns compared to CDs, albeit with increased risk of losses.
Delving deeper: The best low-risk investments for retirees
Once your CD reaches maturity, banks earn money by charging higher interest rates on loans than the rates they pay on customer deposits. This difference, known as a spread, is essential for banks to generate profits. Unlike regular savings accounts that allow flexibility in accessing funds without penalty, a CD entails locking in your deposit for a specific period. Upon maturity, the bank returns your principal and interest. The fixed term of a CD and associated penalties for early withdrawal enable banks to plan their revenue generation from your deposit more effectively. Therefore, they are willing to offer slightly higher rates in exchange for this reliability.
In terms of safety, online-only banks like Lending Club and SoFi are as secure as traditional banks. These institutions are either FDIC-insured or partner with established banks to ensure deposits are protected up to $250,000 by the government. Look for terms like “member FDIC,” “FDIC insured,” or “NCUA insured” when exploring your banking options to verify this protection.
Compound interest refers to the concept of earning interest not only on your initial deposit but also on the interest accrued over time. This compounding effect can significantly boost your savings by making every dollar work harder towards achieving your financial goals. An account’s APY represents the total interest earned over a year, inclusive of compound interest, expressed as a percentage.
A jumbo CD requires a minimum deposit of $100,000 and offers a fixed interest rate and term, similar to regular CDs. In the past, jumbo CDs provided a secure investment option with higher rates than traditional CDs. However, in the current high-interest rate environment, this may not always hold true. It’s advisable to compare rates and terms before committing your funds to a jumbo CD.
A no-penalty CD, also known as a liquid CD, allows you to lock in a deposit for a guaranteed return over a specified period while retaining the flexibility to withdraw funds without penalty before the CD matures. Despite this convenience, no-penalty CDs typically offer lower returns compared to traditional CDs. Given the current high-rate climate, a high-yield savings account might provide comparable or better rates with similar flexibility.
A CD ladder is a savings strategy that involves diversifying your investment across multiple CDs to capitalize on high rates without locking all your funds into a single long-term CD. This approach allows you to access a portion of your investment at regular intervals, providing both rate security and liquidity. Explore how to construct a CD ladder to maximize returns while maintaining flexibility.
Hurry before today’s top rates disappear! What exactly is a brokered CD? Essentially, it’s a certificate of deposit purchased through a brokerage firm rather than a traditional bank or credit union. Similar to regular CDs, you select a term length with a fixed interest rate. However, unlike standard CDs, brokered CDs can be acquired through your investment account either new or from other investors. Delve deeper into the world of brokered CDs and important considerations before diving in.
Distinguishing between saving and investing lies in the accessibility of your funds and the associated risks. Saving involves keeping your money in secure accounts with minimal risk to your principal. Conversely, investing entails acquiring assets like stocks, bonds, or mutual funds that carry the potential for higher returns. Explore further insights on saving and investing to determine the optimal strategy for growing your nest egg.
Please note that the annual percentage yields mentioned were last updated on Thursday, March 13, 2025, at 8:10 a.m. ET. Regional variations and fluctuations in APYs and promotional rates for certain products are possible.
Sources:
– National Rates and Rate Caps, FDIC
– Consumer Price Index Summary, U.S. Bureau of Labor and Statistics
– Producer Price Index News Release Summary, U.S. Bureau of Labor and Statistics
– Employment Situation Summary, U.S. Bureau of Labor and Statistics
– CME FedWatch Tool, CME Group
