CD Term Profitability before Rate Cuts: Savings Experts Provide Insights

CD Term Profitability before Rate Cuts: Savings Experts Provide Insights

In the current financial landscape, certificate of deposit (CD) accounts have been a lucrative choice for savers, offering predictable returns and alluring annual percentage yields (APYs). Thanks to the Federal Reserve's attempts to combat stubborn inflation, the federal funds rate has remained considerable, even with rate cuts in 2024. This high-rate environment has proved advantageous for savers, who've secured high-interest rates by locking in a competitive fixed rate. However, with economic uncertainty looming, CD rates have shown a downward trend.

As we progress through the year, there's speculation of additional CD interest rate cuts in line with potential Federal Reserve rate cuts. Although the Federal Reserve is adopting a "wait and see" approach and is unlikely to make changes at the June meeting, there are hints of rate cuts later on. Before any cuts occur, it's wise for savers to lock in the best CD rates available. But, to do that effectively, choosing the CD term that best suits your situation is crucial.

With a CD account, you can secure your funds for a specific term and a fixed interest rate, bringing stability and clarity, as long as you maintain the account until maturity and avoid early withdrawal penalties. Dr. Lakshmi Balasubramanyan, associate professor of banking and finance at Case Western Reserve University, says, "CDs have no surprises...So if consumers are very risk-averse and they just want to save without a whole lot of stress, CDs are excellent options."

One of the crucial decisions is selecting a CD term. Unlike savings accounts with easy accessibility and liquidity, CD funds should ideally remain untouched throughout the term to avoid early withdrawal penalties. Therefore, CD accounts are a great complement to high-yield savings accounts that house your emergency fund.

When deciding on a CD term, consider if you can manage without those funds for the specified period, and weigh other factors during your decision process:

Short-Term CDs: Maximizing Returns

If you aim to maximize returns and secure the greatest yield, the most beneficial CD term for you right now is likely a short-term CD, experts argue. While you'd usually get higher returns with a long-term CD, that's not the case in the current rate environment.

"From what I've seen, right now the best CD options that are offering the highest interest rates are the shorter-term CDs," says Brittany Pedersen, director of deposit and payment operations at Georgia's Own Credit Union.

Generally, CDs under the short-term umbrella have terms that are less than a year. So, for example, it makes sense to contemplate a 3-month CD, a 6-month CD, or a 9-month CD. For short-term CD accounts, Pedersen says CD rates are around 4%.

Long-Term CDs: Prioritizing Long-Term Security

If you have a sturdy emergency fund and desire a stable investment vehicle, a long-term CD might be worth considering. Long-term CDs could have lower rates at present, as compared to short-term CDs. However, if the Federal Reserve executes more rate cuts, there could be further drops.

With a long-term CD, you can lock in competitive CD rates now with something like a 2-year CD or a 5-year CD.

"Even though the long-term CD rates aren't the highest, they're still good, especially if you look at where CD rates have been over the past five to ten years. If people can afford to lock up their money in a longer-term CD, it's a nice, safe way to save your money and just earn additional interest," says Pedersen.

CD Ladder: Balancing Flexibility and Returns

You aren't restricted to opening merely one CD account. You can open several CD accounts with varying CD term lengths for each account. For example, by mixing a 6-month CD, a 1-year CD, an 18-month CD, a 2-year CD, and a 5-year CD, you can implement a CD laddering strategy.

"CD laddering is a great strategy for savers who are looking to lock in great rates while remaining flexible in case better rates appear on the horizon. It also means you have some of your cash available to you at regular intervals in case you need access to your money," says Shana Hennigan, chief business officer at Raisin, a savings marketplace.

When using a CD ladder, you have a combination of short-term and long-term CD terms. This way, you can enjoy different maturity dates and capitalize on various CD rates.

"As your CDs come due, you can decide to either reinvest in another CD or put your cash somewhere else like a high-yield savings account," adds Hennigan.

In conclusion, CD interest rates could witness a downward trend, but you can seize the most competitive rates now, before any future rate cuts by the Federal Reserve. The most beneficial CD term for you will depend on your priorities. However, whether you opt for a short-term CD, long-term CD, or a mix of both with a CD ladder, it's essential to do thorough research and shop around.

"When discussing CD rates at present, it's worth noting that there can be substantial differences in available rates depending on the bank or credit union you choose," says Hennigan. "While it's impossible to predict with certainty where rates will be towards the end of the year, now is still a suitable time to lock in an attractive rate."

Before opening a CD account, be sure to scrutinize the terms and conditions, especially early withdrawal penalties. If you're searching for something more flexible, you can also explore high-yield savings accounts as an alternative or in conjunction with a CD. Note that savings account interest rates are variable, so the rate won't be fixed like with a CD. Choose your path wisely, because putting money away now in a high-rate environment can help your money grow efficiently.

1. In the current financial landscape, savers are opting for certificate of deposit (CD) accounts, which offer predictable returns and high annual percentage yields (APYs), due to the Federal Reserve's efforts to combat inflation.
2. When deciding on a CD term, one crucial factor to consider is the balance between maximizing returns and ensuring long-term security, as experts argue the most advantageous CD term for high returns at present is typically a short-term CD, such as a 3-month, 6-month, or 9-month CD, which currently offers rates around 4%.
3. Alternatively, if one has a robust emergency fund and seeks a stable investment vehicle, a long-term CD, such as a 2-year or 5-year CD, could be worth considering, even though long-term CD rates might currently be lower than short-term CD rates.
4. In pursuing a balance between flexibility and returns, one can consider implementing a CD laddering strategy, by opening several CD accounts with varying CD term lengths, such as a 6-month CD, a 1-year CD, an 18-month CD, a 2-year CD, and a 5-year CD, which provides a combination of short-term and long-term CD terms and maturity dates.

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