![]() Here are a few options you can explore if you’re on the fence. The trade-off is that indecision comes with a cost, one way or another. In that case, there are a few ways you can keep one foot in and one foot out. Sometimes, it’s not as clear what the best choice is: If you’re still commitment shy, or if you know you’ll be moving but don’t aren’t entirely sure when. “I don’t think I would go with a five-year CD,” Mendlowitz says. And for very long-term savings goals, investing in the stock market becomes a more viable goal. That’s because the further you look into the future-beyond the next two to three years-the murkier forecasts for the economy and interest rates tend to get. While CDs aren’t ideal for money you will need in the short term, they also aren’t the best option for the very long-term. ![]() ![]() While most penalties just reduce the amount of interest you would otherwise accrue, it’s theoretically possible to lose principal, as well. Penalties typically range from two to 12 months’ worth of interest earned, with higher penalties assessed on longer-term maturities. If you buy a CD and do end up needing the cash, you are likely to have to pay a penalty. If you’re going to need it in the next two to three months, just keep it in cash,” Cole says. “Determine when you think you’re going to need the money. When it’s too risky to lock in today’s ratesīecause CDs require you to lock away your money for months or years, they are less useful for cash you’ve set aside to cover surprises or other pressing short-term needs-say repairing a broken hot water heater or a car transmission. The hassle creates a potentially useful barrier, says Scott Cole, founder of Cole Financial Planning and Wealth Management in Birmingham, Ala. If you’re not as disciplined with money as you want to be, cash in a CD can be less tempting because it’s relatively difficult to withdraw. “The goal is to try to earn as much interest as possible on all of your cash.”ĬDs can also help with budgeting, say planners. “If you know you’re going to have to replace your car, or you know you’re going to have to cover college expenses, there’s no need to let (your cash) sit” in a low-interest account, says Zaneilia Harris, president of Harris & Harris Wealth Management Group in the Washington, D.C. The upshot, say financial planners, is that CDs work best if you are planning to set aside cash for a big expense, like a wedding or the down payment on a house, where you can be relatively certain about the timing. Once you buy a CD you can’t touch your savings until the CD matures. Second, they let you lock prevailing interest rates, so if rates fall you’ll continue to earn the rate you signed up for, for the entire term of the CD. First, they offer interest rates that are significantly higher-often by up to a percentage point. When you should lock in current CD ratesĬDs have two big advantages over savings accounts and other options like money-market funds. Ultimately the answer will depend on your personal financial situation. Withdrawing money early from a CD typically means paying a hefty penalty, which could eat up most or all of the interest you earn.ĭeciding when to lock in CD rates is always a balancing act-and even more so in today’s climate of high economic uncertainty. More important, if you need that money before the CD matures, you could be in a fix. If Wall Street’s forecasts are dead wrong and next year CDs offer even better rates, you could miss out on some potential gains. The upshot is that if you buy a longer term CD now-say one with a two or three-year term-there is an excellent chance you could continue to enjoy generous payouts long after rates on vehicles like savings accounts and money-market funds have fallen back to earth.īut there are risks too. “There’s a better chance that they’ll drop than stay the same,” says Edward Mendlowitz, East Brunswick, N.J.-based emeritus partner at accounting firm Withum. In fact, futures market data suggest nearly 9 in 10 investors think the Fed will end up cutting rates by the end of year. While higher interest rates have dented inflation, many on Wall Street worry they’ve also slowed economic growth. Still, today’s generous payouts may not last. Today top CD rates on three- to five-year CDs are 4% to 5%, the highest they have been since the mid 2000s. ![]() Rates for savings instruments, including CDs, have been steadily climbing. But, if you don’t know exactly when you plan to spend your savings-or if you are worried about surprises-there’s a lot more to consider.įor the past year the Federal Reserve has been regularly hiking short-term interest rates as part of its effort to fight inflation. For some savers this move is likely a no-brainer. Buying a long-term CD means you could lock in today’s generous rates for years to come. Short-term interest rates are higher than they have been in a decade.
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