interest rate at certificate of deposit Certificates of deposit (CDs) have been quite attractive to savers over the past few years, but inflation has cooled in the past few months and the Fed has adjusted policy accordingly in late 2024. CD account interest rate begins to decline. But luckily they haven't hit rock bottom yet - savers can still make money moderate interest If only today's CDs were smart.
"Interest rates are better than they were five years ago, but not as good as a year ago," said Patti Brennan, president and CEO of Key Financial. "Most maturities peaked in October 2023 and have been flat ever since. Still, as a core emergency fund, they appear to be enjoying a very rare period of keeping pace with after-tax inflation."
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How much should you invest in long-term CDs this January?
Are you considering a long-term CD this January? Here's what experts say to do.
Understand your needs and timeline
"What the money is used for is key" when determining how much money can safely be kept in a long-term CD, Brennan said.
Will you need it for your wedding in five years? If so, how much will it cost? Will your child be going to college in three years and need a certain amount of money? Knowing what you'll ultimately do with your CD proceeds can help you zero in on the amount you save.
You also need to know how much money you can live without using for a long period of time.
"Treat the funds you deposited as unavailable," says Krisstin Petersmarck, president and founder of New Horizon Retirement Solutions. "If you do turn in the CD before the maturity date , you'll face an early withdrawal penalty. So, depending on the terms you agreed to when you chose the CD, you'll lose some or all of the interest you earn—and the longer the CD, the larger the penalty typically can be."
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Don’t invest too much – and set aside an emergency fund
careful Too much deposit Deposit into a CD account, experts say. For one, getting too big could push you out of FDIC protection.
"If your investment exceeds FDIC coverage and the issuing bank has financial problems, you could lose your principal," said Harmon Kong, co-founder of Apriem Advisors.
The FDIC currently provides coverage of $250,000 per depositor. This means that if the bank fails, your deposits are protected and will be repaid to you with a balance of up to $250,000. If you exceed this number, there is no such guarantee for additional cash.
Is there another problem with investing too much? you may run out your emergency fund.
CDs differ from traditional savings accounts in that you can withdraw funds from them when you need to withdraw them. When you put money in a long-term CD, you won't have access to cash for several years - No early withdrawal penaltyanyway. Therefore, you need to make sure you have enough emergency funds set aside to deal with any financial storms.
"Make sure you have other funds available to cover those unexpected or emergency expenses," Petersmark says.
Making the Most of CD Ladders
Most experts recommend a mix of Long-term and short-term CDs In the so-called CD ladder. This involves spreading your savings across several CDs of different maturities, allowing you to Take advantage of high fixed deposit rateswhile also ensuring you have regular access to cash (each time your account matures).
"CD laddering is a strategy of staggering maturity dates within a time frame so that certain CDs mature at different times," Kong said. “The idea behind this strategy is to provide you with some liquidity early on when you need it. If interest rates go down, then some of your money will be locked up at a better rate than what’s currently available. If rates go up, then your previous CD will mature, allowing you to invest at a higher interest rate, which will provide your CD funds with maximum flexibility."
This strategy can also help you achieve different financial goals, Brennan says.
"Choose a six-month CD to cover August tuition, an 18-month car, or three separate CDs of different terms for the first three years of retirement," Brennan says.
bottom line
Determining the amount to put in a long-term term deposit is a process that requires you to weigh several different factors, including your goals and your timeline for accessing the funds. If you're not sure how best to implement your CD strategy, or how much money to put in your account, it may be helpful to speak with a financial advisor. They can help you determine the right move for your goals and budget.