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With the FED raising rates considerably over the past 2 years, saving accounts and CD yields have climbed right alongside the FED Funds Rate. But with the FED signaling an end in sight, is now the time to lock in these higher rates on your surplus funds?
Taking a look around at yield options, you might notice online savings rates are pretty similar to CD rates, whether that’s with 1-year CD’s or longer-term CD’s.
So with longer-term CD’s (with 3 or 5-year terms) not paying any more interest than shorter-term CD’s (6-month, 1-year), why would you want to lock up your money with no higher interest reward?
For those who want a longer-term guaranteed rate of return, a 5-year CD may actually make sense, as long as any invested funds won’t be needed during the lock-in period. If the FED starts dropping rates in the next year, savings & CD rates will decrease as well. So a 5-year CD paying 5% today might be a way to ensure 5% earnings over the next 5 years in a time period where rates may start dropping back to the 4’s and 3’s on these “safer” investments.
Conventional wisdom is to only use longer-term CD’s for funds you won’t need to touch for the term of the CD, as well as for the conservative portion of your portfolio. CD’s are generally best served for specific savings goals with specific timestamps, or for those near/at retirement. They might not be best to replace standard market investments since CD’s may not keep up as well with inflation, and they of course put a ceiling on your earnings/growth potential.
You might also consider a combination of CD’s and savings, or even CD laddering, where you obtain a combination of short and long-term CD’s.
Each situation is unique. Assess yours accordingly!