Ofbest cd'scurrently yield generous rates between 5% and 5.50%. With prices this high you basically get free money with little to no risk, plus a chance to freeze an APY earlybankerstart lowering rates. You have a linebanks and credit unionsto choose from, but since CD prices are likely to change later this year, what's the best strategy for investing in them? If you have a reasonable amount of extra money to invest, the answer is clear:a CD ladder.
Why CD ladders are the best strategy for today's market
CD laddering is a strategy where you open multiple CDs with different expiration dates. Think of the “ladder” as a step forward in time, and the CDs as your steps. You can have a 1 month increment, a 3 month increment, a 6 month increment, a 1 year increment and so on as long as you can afford it.
Why would you confuse these types of CDs? One reason is that it ensures you have cash available on a regular basis. Most CDs have early withdrawal penalties ranging from a few months to a year or more. So instead of making a large deposit into one or two CD accounts, give yourself some flexibility by spreading your money among several CDs with different terms.
By combining short-term and long-term CDs in this way, you can also take full advantage of today's best prices. Short-term CDs, which currently have a higher APY, allow you to earn more interest, while long-term CDs allow you to freeze these rates for a longer period of time.
This is important in today's market because CD prices will not remain high for long. Everything dependsThe Federal Reserve's Monetary Policy, which has so far been an aggressive proponent of raising the federal funds rate to curb inflation. The federal funds rate sets the pace for CD rates, so if one rises (or falls), the other won't be far behind. The central bank hasn't changed the fed funds rate since July 2023, but if the economy continues to improve, we should see rate cuts sometime this year.
Locking up money in long-term CDs is therefore a good strategy to prolong high CD prices. If you play your cards right, your CDs could earn the very best prices several times over in the years to come. Likewise, short-term CDs can help you earn more interest now, but then give you the opportunity to reinvest the money in other securities when they mature.
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How to build a CD ladder for today's market
To build an effective CD ladder for 2024, ask yourself the following questions:
- How much can I invest in CDs?You divide your deposit into smaller chunks, but it's important to decide how much you're willing to put downslot in a CDof any term. Keep in mind that high yield CDs often have minimum deposits, e.g. $1,000. This can limit the number of CDs you can afford to buy.
- What expiration dates do I want?You have options. I've seen CDs that mature in seven days and others that mature in twenty years. However, most bank CDs have intermediate termssix monthsand five years.
- What is my backup plan if I need cash quickly?Always have a plan B. While CDs can give you some flexibility, you may still need cash before they mature. Combine your CDs with onesavings account with high returns, money market account or no-penalty CD for more liquidity.
Overall, CDs are a great investment for 2024, both because of their high APY and their guaranteed returns. Investing in one CD is fine, but if you have the money and time horizon, definitely consider increasing it – you can get the best rates on long-term CDs while locking in the very best APYs on the market.
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FAQs
For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.
What is a good strategy to maximize returns on a time deposit CD )? ›
Use short-term CDs
Another strategy is to open short-term CDs to try to maximize yield, and then when the CD term ends, do a CD rollover into another short-term CD. Or you might then choose a longer duration once the short-term CD matures, depending on the situation.
What is the CD bullet strategy? ›
Best for targeted savings goals, the CD bullet strategy involves investing in multiple CD s at different times, all with the same target maturity date. This allows you to continually contribute money toward your goal while taking advantage of potentially higher rates on long-term CD s.
Why should you put $5000 in a 6 month CD now? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Is now a good time to invest in CDs? ›
Are CDs worth it in 2024? CDs are worth it in 2024 for the right investor. After rate hikes in the past year and a half, many of the best CDs yield well over 5% but these rates may not last for long. For some, it could be worth it to lock in high rates before the Fed starts cutting rates later in the year.
Are CDs a good investment for 2024? ›
The bottom line
Overall, long-term CDs could be a good investment for those who want to lock in guaranteed returns at a relatively high rate in early 2024. But as the year progresses, if interest rates fall as expected, then long-term CDs could lose some of their appeal.
Can you lose money in a high yield CD? ›
While it's unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you've earned enough interest to cover the penalty charged. Typically, CDs are safe time deposits that guarantee an interest rate for the term that you agree to keep money at a financial institution.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
What is the biggest negative of investing your money in a CD? ›
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
What's one tip for investing in CDs? ›
A CD can be a high-yield, safe investment when you're able to lock in the money for a set term. To get the most for your money, be sure to shop around for the best rate, select a term you're comfortable with and go with a bank or credit union that's federally insured.
One way to address early withdrawal penalties in a portfolio is to create a CD ladder. A CD ladder involves investing equal sums of money in multiple CDs, each with a different maturity date. Different types of CDs may fit investors' needs, including step-up CDs, bump-up CDs, and jumbo CDs.
What is laddering strategy? ›
The most common usage of the term laddering is found in retirement planning. There, it refers to buying multiple fixed income financial products of the same type—such as bonds or certificates of deposit (CDs)—each with different maturity dates.
Are there any 6% CDs? ›
Can You Get 6% on a CD? Earning 6% interest on a CD can be done, but you might have to do some digging to find an account that works for you, and you'll probably have to join a credit union. Currently, no banks offer 6% CDs, but some credit unions do. To open an account with a credit union, you need to become a member.
Should I lock in a 5% CD now? ›
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
Can you get 6% on a CD? ›
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
Why is CD not a good financial investment? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 1.81% | $181 |
| 2 years | 1.53% | $308.34 |
| 3 years | 1.38% | $419.74 |
| 4 years | 1.29% | $526.07 |
1 more rowMar 20, 2024
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
