December 14, 2018

Bank CD Rates

Understanding Bank Rates

understanding bank ratesDue to the recent recession, which has seen the stock markets increase and decrease dramatically, people looking for a stable return on investment may be looking for different ways to save and invest their money. Those looking for a guaranteed and stable return on their investment should consider opening up a CD. A CD account comes with a fixed rate of return and both the initial deposit and the interest income earned are fully insured by the FDIC.

Finding the Best Rates

While investing in a CD could be a way to earn a guaranteed return on investment, you will likely find that bank CD rates are extremely low. While they are low, there are ways to find better rates on these accounts. One way to get a better rate would be to open a larger account. Accounts which are opened with a balance of $50,000 or more are frequently considered jumbo CD accounts by most banks, and these CD accounts normally provide much higher interest rates.

When trying to find the high yield CD rates, you will also likely find that certificates of deposits with longer terms will likely have higher interest rates. A CD term can range anywhere from just a few months to over five years in length. When you open a CD, you will be committing your money in that account for the length of the term of the CD. If you have to withdraw the money early, you could end up being charged a penalty that will largely negate all of the interest income that you have earned. Therefore, if you are planning on opening a long-term CD, you need to be very sure that you will not need to withdraw any of the money prior to the CD maturity date.

Understanding the Risks

When you are opening a long-term CD, you will also take on the risk that interest rates will increase in the future. Since interest rates on CD products go up and down over time, you may be able to get a better rate on a CD in the future. However, if you have already committed your money to a long-term CD, you will be stuck with the lower rate even if rates have increased dramatically.

CD ladder systemSince there is obvious risk when it comes to placing your money into longer-term CD accounts, you should look for ways to limit the risk, but also maximize your CD return. One way to maximize your return, but also limit risk, would be to set up a CD ladder. A CD ladder is a system where you invest your money into bank accounts with different staggering account terms. For example, you should place about 20% of your money into five separate accounts, which range in staggering terms from one to five years. Then, as each CD matures, you should re-invest the money into a new 5-year CD. This will ensure that each year 20% of your money will rollover. This way, if bank CD rates increase, you will be able to take advantage of the increased rates.