Top CD Rates 2024
Certificates of Deposits (CDs) are straightforward when it comes to investing your savings. They operate like enhanced savings accounts, offering a fixed Annual Percentage Yield (APY) for a specific term length. One notable drawback to CDs is the limited liquidity associated with them.
Typically, withdrawing from them before the term ends results in a penalty, losing some or all of the accrued interest. While CDs are great choices for many, understanding alternative investments like high-yield savings can be beneficial when planning your finances. Let’s explore and compare the best CDs against other popular financial savings tools and find the best investments for your money with minimal risk.
What Is a CD Rate?
A CD Rate is the specific interest rate that financial institutions provide for a CD account. This rate is what really distinguishes it from regular savings accounts, as they are normally much higher. CDs offer multiple advantages, as they generally have higher interest rates. Still, they also stay the same for the set duration chosen, making them more predictable - even if interest rates in the overall economy fall.
While the CD rate, also known as the Annual Percentage Yield (APY), is an important factor, it’s not the only one to consider when opening an account. High interest rates are tempting, but you should consider things like the minimum deposit requirements, the frequency of interest compounding, the efficiency and reliability of customer service, and the user experience of the financial institution, both online and in-person.
While getting the best CD rate is important for optimal returns, the holistic banking experience and other associated factors should not be overlooked. The balance between the maximum returns and convenience - as everything has its cost.
Which CD Term Should I Choose
Selecting the right CD term is challenging because there are so many types of CDs and types of CD accounts. The biggest thing is understanding your financial goals and objectives while gauging the current interest rate environment. Here are a few steps to help you out:
- Determine the Time Period: Identify when you’ll need the money. Whether for a new care purchase in 3 months or a dream home in 5 years, your time horizon directly impacts what kind of CD you should buy.
- Evaluate your financial goals: Once you have a timeframe, understand the potential earnings. Analyze the factors like the CD’s term, its APY, and the minimum deposit required to gauge how much you’ll earn over time. To make proper decisions with your savings, you need to understand what you are saving for.
- Consider current interest rate trends: CD rates are dynamic, so it is important to understand when they are relatively high or low. If you think CD rates are headed higher, leaning towards shorter terms or lock-in periods might make sense. If rates are moving lower quickly like during a recession, a longer term is a better option to lock in the more favorable rate.
- Assess liquidity needs: Short-term financial needs can impede your ability to lock in for longer terms. If there’s even a slight possibility you might need some of the funds you’re investing in CDs, look at parking that portion into shorter terms. No-penalty CDs, which permit withdrawals without penalties, might also be worth exploring (although they tend to offer lower rates).
- Compare APY across terms: There’s a common misconception that a longer term always equates to higher rates. That’s not always the case, so cross-reference the APYs you’re being offered, as sometimes shorter terms can offer better rates.
- Factor in renewal policies: Read the fine print. Some CDs have an automatic renewal feature. While convenient in some cases, ensure you are on top of any renewal dates, as you can get locked into a term that doesn’t align with your financial plan.
How Much Money Should I Keep In CDs?
Determining how much money to keep in Certificates of Deposit (CDs) depends on several personal financial factors. Here are key considerations to help you decide the right amount:
- Emergency Fund: Ensure you have an adequate emergency fund in a more liquid account before investing in CDs. A common guideline is making 3-6 months' worth of living expenses readily accessible.
- Financial Goals: Align your investment in CDs with your financial goals. CDs can be a good option if you have short-term goals (like buying a car in a few years). For long-term goals (like retirement), consider more growth-oriented investments.
- Risk Tolerance: CDs are low-risk investments. If your risk tolerance is low and you prefer guaranteed returns, you might allocate more to CDs. However, remember that low risk often means lower returns than other investments like stocks or mutual funds.
- Diversification: It's important not to put all your savings into CDs. A well-diversified portfolio includes various asset types, including stocks, bonds, and cash or cash equivalents like CDs.
- Interest Rates Environment: In a low-interest-rate environment, the returns on CDs might be modest. Conversely, if rates are high or expected to fall, locking in a good rate with a CD can be beneficial.
- Inflation: Consider the impact of inflation on your CD investments. If inflation rates exceed your CD's interest rate, your investment might lose purchasing power over time.
- Liquidity Needs: Assess your need for liquidity. Money locked in a CD isn't easily accessible without incurring penalties. Ensure you have enough liquid assets for unexpected expenses.
- Age and Investment Horizon: Your age and the time horizon for your financial goals can influence how much to invest in CDs. Younger investors might focus more on growth, while those closer to retirement might prefer the stability of CDs.
- Income Requirements: If you rely on your investments for income, consider how much you need to generate from your portfolio. CDs can provide a predictable income stream, but typically at lower rates.
- Current and Future Expenses: Factor in any large expenses you anticipate soon. Money needed for these should not be tied up in CDs.
Recommendations
Scenario:
- Total Savings: $50,000
- Monthly Expenses: $3,000
Allocation Based on the Scenario:
- Emergency Fund:
- Aim for 3-6 months of living expenses in a liquid account.
- For monthly expenses of $3,000, this would be $9,000 to $18,000.
- CD Investment:
- After setting aside $18,000 for an emergency fund, you have $32,000 left.
- If you want to keep 30% of your remaining savings in low-risk investments like CDs, that would be 30% of $32,000, equaling $9,600.
- Diversification:
- With $9,600 in CDs, you still have $22,400 to invest in other assets like stocks, bonds, or retirement accounts for diversification.
- Short-Term Goals:
- If you have a goal within the next 2-3 years (e.g., a down payment for a car costing $10,000), consider putting this amount in a short-term CD or a high-yield savings account for safekeeping.
- Long-Term Goals:
- Allocate the remaining balance towards long-term goals like retirement or a child’s education fund, which could be in higher-risk/higher-return investments.
Best Rates for November 2024
Finding the best CD rates for your desired term is important, and APY is one of the most important factors. However, we noted above that there are many choices when deciding what is best for you and your unique situation. For example, banks and credit unions may offer various perks for investing with their CDs, like more accommodating minimum deposit requirements or better customer support.
Sallie Mae
Sallie Mae Bank is a good option for consumers looking for an online bank with competitive interest rates on CDs. The bank’s CDs offer a good way to grow your savings over time, and the FDIC insurance provides peace of mind.
Popular Direct
Popular Direct is best for anyone looking for an online savings account and CDs that pay top-notch yields. Popular Direct offers a variety of CDs with terms ranging from three months to five years. The minimum deposit to open a CD is $10,000. The highest APY for a CD is 5.35% for a 6 or 12-month CD.
Several are in the same range, so do your due diligence and find what works for you.
CDs: Pros & Cons
Some of the pros and cons to be aware of when locking your money into a CD are:
How Are CD Rates Determined?
Determining CD rates is complex and involves macro and micro factors. The rate you see isn’t just a random figure but a result of an evaluation of these factors. Some of the primary determinants include:
- Federal Reserve Rates (Fed rates):
The Fed plays an important role in influencing CD rates. Banks usually adjust their CD rates in response whenever the Fed moves its overnight banking rate - for instance, hiking it higher to combat inflation. Thus, a rise or fall in the Fed rate often directly translates to rises and falls in CD rates.
- CD Term Length:
The duration for which you commit your money impacts the rate you receive. Longer-term CDs usually offer higher rates because you’re locking in your money for longer, allowing banks to utilize those funds for longer. Conversely, shorter-term CDs generally have lower rates. It’s not always the case, so double-check before purchasing.
- Deposit Amount:
The more you deposit, the more the financial institution benefits. Higher deposit amounts then can sometimes fetch better rates. Some institutions offer tiered rates, where larger deposits get a higher APY.
- Competition Among Financial Institutions:
Banks and credit unions always want new customers. They closely monitor what each other offers and can adjust their rates accordingly. A bank may offer higher rates to lure customers if it wants to increase deposits.
- Inflation Expectations and Predictions:
Inflation diminishes your purchasing power over time. If banks anticipate higher inflation, they may increase CD rates to get ahead of their counterparts. This makes CDs more appealing, so customers feel that they’re at least maintaining, if not growing, their money’s value.
- Overall Economic Health:
The general economic situation of a country or region affects its CD rates. In an expansionary economy, consumers are more likely to spend than save, which may lead banks to increase CD rates to entice them to save.
- Bank’s Strategic Objectives:
Sometimes, a bank will desire to boost its deposits or manage its liquidity higher or lower, affecting its CD rate offer decision.
The CD rates you come across reflect these intertwined factors, and understanding them will help you be a more informed investor.
Are CDs Safe?
CDs are extremely safe. In the U.S., the Federal Deposit Insurance Corporation (FDIC) also safeguards the majority of CDs. Each depositor’s funds in a bank are insured up to $250,000 - including your purchases of CD investments. Even if the bank where you have your funds invested goes bankrupt, your money (up to the FDIC-insured limit) will remain shielded from any adverse effects. In addition to the insurance, CDs promise fixed interest rates - offering more predictability and insulating from market volatility.
CD Fees
There are some associated fees and fee structures when purchasing CDs. While they might seem negligible and unimportant when you first purchase them, watch out for any early withdrawal fees and terms. Should you find yourself in a position where you urgently need access to your deposited funds before the maturity date, banks can and often levy a penalty for taking your money out. The penalty can be large enough to significantly reduce or even negate your accrued interest and, in some cases, claw back some principal.
Another thing to look for is any associated maintenance fees, like annual or monthly. Some banks may charge you if you are under a certain balance or have annual fees associated with the type of account. Always do your due diligence and read the fine print, as any costs associated will affect your true return on investment.
Alternatives to CDs
While CDs are sought-after by many looking for consistent, risk-free returns, it’s worth looking at alternatives that align better with your financial goals. A few options are below.
IRA vs. CD
IRAs are a way to save for retirement - they are Individual Retirement Accounts. Unlike CDs, IRAs don’t tie your money for a fixed term, as you invest in a multitude of options inside of the IRA itself, allowing your money to grow potentially more for a longer time. CDs have a fixed return, which is more appealing for some investors.
Money Market Accounts vs. CDs
Money market accounts are a step up from a checking and savings account. They tend to offer higher interest rates, and even some offer check-writing capabilities without a restrictive lock-up period. CDs will likely offer higher rates, though, for those willing to keep money invested for a longer term.
Savings Accounts vs. CDs
Savings accounts offer liquidity and ease of access but often have lower interest rates. They are often more suitable for funds that you need within a short period or even to cover day-to-day expenses. CDs will outperform in terms of returns compared to savings accounts, but you forfeit the liquidity aspect.
Bond Funds vs. CDs
Bond funds invest in a pool of individual bonds, and then you purchase a share of the mutual fund so you can benefit from the growth. They offer diversification and potentially better returns than CDs but come with market risks and a management fee. CDs do not have the market fluctuations associated with bond funds, as well as lower fees, in general.
Peer-to-Peer Lending vs. CDs
Peer-to-peer lending is a relatively new financial instrument, allowing users to earn interest by lending to individual borrowers or small businesses online. They can offer higher returns than CDs, but come with increased risks - including no FDIC insurance.
These alternatives show a few ways you can approach saving and investing. While CDs offer a stable investment, ensure you understand the benefits and drawbacks before locking in your funds.
Conclusion
Certificates of Deposit (CDs) offer opportunities to gain interest in your investments as close to risk-free as possible. They are safe and predictable returns, although understanding the nuances between different financial institutions is important. In addition, watch out for any costs associated with early withdrawal when making a financial decision. As always, contact a financial expert if you have further questions or need help with managing your finances.
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