Today’s question comes from Linda from California…
“Last year I put $75,000 into a CD for 11 months. The maturity date is coming up and I don’t know what to do. I usually let it roll over.
The bank letter says the current interest rates are 0.05% and 0.25%. Not very good.
If you could tell me what to do, I’d really appreciate it.”
Matt & Joel’s response: We love that you took advantage of a CD for the past 11 months, Linda! CD rates have been epic after 10+ years of utter worthlessness. As the Fed raised interest rates, savers have really benefited.
But as the potential for rate cuts looms larger, locking in higher rates could be a smart strategy for savers who are open to locking their money up in a certificate of deposit.
Big banks vs. online banks
Whoa! You got physical mail from the bank? That’s a tell-tale sign that you’re likely working with one of the big banks, like Chase, Bank of America, or Wells Fargo, haha.
You definitely don’t want to stick with the bank you’re currently with. I’m not sure what sort of rate you were getting before, those new rates you mentioned aren’t competitive at all right now!
Run away from this bank as fast as you can. Instead, do business with one of the online banks that isn’t pretending like rates are stuck in 2018.
Ally is a great place to turn, although you might be able to eke out higher rates elsewhere.
One of our favorites – CIT Bank – has a ‘no penalty CD’ right now with a 3.50% interest rate. It’s a really cool product in case you decide you need the money before the CD term ends.
It might be worth comparing a handful of different banks over at a site like Doctor Of Credit. Just make sure any bank you look at is FDIC insured and has great reviews!
Consider a HYSA
You could also look into high yield savings accounts. Or even consider a mix between a HYSA & a CD, splitting your funds between both savings vehicles.
Interestingly enough, the premium for CDs seems to have gone away. You used to be able to make an extra half a percent or so if you opted for a CD instead of a savings account. But you can probably snag a higher interest rate and see superior returns in one of our favorite HYSAs these days.
Betterment is paying 5% as of this moment. And with an initial half a percent bump promotion for higher balances. 5.5% is better than any CD rate I’ve seen. And it’s far superior to what you’re being offered from your current bank!
The downside of going that route is if rate cuts become frequent, that killer rate isn’t gonna stay there. Certificates of deposit are the alternative that allows you to lock in a particular rate for a specific period of time. If rates drop significantly, you might end up wishing you had locked in while rates were elevated.
CD rates & timing
Predicting where interest rates will go in the future is impossible.
The higher CD rates tend to be for shorter terms right now. Which makes sense given market expectations for rate cuts soon. So a 9 or 12-month CD might be in order.
But you’re also not as protected against a more significant downward rate trend over a longer time period. The other thing we want you to consider is when you’ll need this money.
Is it even a good idea to have this much in a CD!?
If you’ll need these dollars for a down payment or to live on in a year or two, savings products are your best bet. But depending on your timeline, if some of these dollars are for 5+ years down the road, investing a portion of them could make sense.
Just putting that on your radar! There’s a big difference between saving and investing.
The Bottom Line:
If you’re looking at a new CD, we highly suggest shopping around and finding a better bank. You could realistically see a 4+% bump in earnings on that $75k. We’re talking about thousands of dollars over the course of the year! This is well worth a little bit of your time & energy.
Keeping that money in a HYSA might be a good short term solution, too. You can still get ~5% interest in a few online banks right now.
And seriously think about your time horizon for that money. The stakes are high with $75k. If you don’t need it for decades, you’ll want to invest it for the long term.
For the full version of this discussion, check out Podcast Episode #859 (it’s the 3rd question in the episode)
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