Many banks now offer certificates of deposit (CDs) with attractive interest rates. Some even provide rates as high as 5% or more for a two-year term. Wells Fargo, Morgan Stanley, First Foundation, and Pacific Crest Savings Bank are among the current options; however, these offerings change regularly, so it’s essential to verify for the most up-to-date choices. Notably, the best deals are often found through online brokerage accounts.
For those with a longer investment horizon, there are CDs available that pay 4.8% or higher over a three-year term. These options include Sallie Mae Bank, UBS, and First Foundation. While some other CDs may seem enticing with advertised rates of up to 5.5%, these particular options end up paying significantly more interest in reality. It’s crucial to be cautious as the CD market can be riddled with traps for the uninformed.
One common pitfall is CDs that offer high rates for only a short period. For instance, if a nine-month CD claims an annual percentage yield (APY) of 5.5%, you won’t receive the full 5.5%. Instead, you’ll earn only 4.125%, equivalent to nine months’ worth. APY is a useful tool to compare different accounts, but it can also be misleading.
Choosing a two- or three-year CD with an interest rate around 5% will likely yield better returns than opting for a one-year CD with the same rate. The longer-term investment allows for compounding interest over a more extended period, resulting in greater overall earnings.
When a one-year 5% CD matures, finding a similar interest rate for reinvestment may prove challenging. Market predictions indicate that short-term interest rates will decrease in the following year. Thus, the prudent move would be to consider longer-term options or choose a shorter-term CD only if there’s a specific need for the funds or if one disagrees with market forecasts.
Investing in high-yield CDs can be a smart strategy to grow one’s savings. By carefully considering the terms and potential returns, individuals can make informed choices that optimize their investment growth.
CD Traps to Watch Out For
Interest rates on Certificates of Deposit (CDs) can be enticing, but there are pitfalls to be aware of. One such trap is the lack of call protection, which means the issuing bank has the power to cancel your CD and its high interest rate prematurely, sometimes within just a couple of months.
These seemingly attractive rates are often just teaser rates designed to lure in customers.
If you want to find call-protected CDs with the best rates, you should consider the options offering 5% for two years or 4.85% for three years.
You might wonder how good these deals truly are. In fact, they are quite impressive. These rates are more than 2 percentage points higher than the most recent trend inflation rate. In June alone, prices rose by 0.2%, resulting in an annual trend rate of 2.4%. Predictions from the futures markets suggest that a year from now, the Federal Reserve’s short-term rates will be around 4.25% or 4.5%, and likely decreasing.
Of course, it is important to remember that such predictions from the futures markets are not guaranteed.
Nevertheless, these CD rates offer a significant improvement compared to what most people currently receive. According to Bankrate.com, which sources data from the Federal Deposit Insurance Corp., the average interest rate paid on savings accounts in America is just 1.71%.
This shockingly low rate represents only one-third of the short-term rates.
For years, many Americans have overlooked the interest they were earning on their savings accounts because it was virtually non-existent. Rates were either zero or close to it.
We are all constantly busy, and checking savings account rates tends to fall to the bottom of our to-do lists.
While this may be good news for bankers, it certainly isn’t great news for us as consumers.
Now, whether a CD is the right choice for you is a different question altogether. CDs provide security and offer FDIC guarantees for up to $250,000. Typically, there is an early withdrawal penalty, often equivalent to just a few months’ worth of interest. On the other hand, conventional wisdom suggests that stocks are generally a better long-term savings vehicle.
However, if you are set on getting a CD, the rates of 5% for two years or 4.85% for three years are going to be pretty hard to beat. They are definitely a significant improvement compared to the meager 1.7% offered by most savings accounts.
