While the recent inflationary pressures affecting the U.S. economy have not been kind to your budget, they have been beneficial to people with the means to put some money aside.
Why Now Is the Time To Open a 5-Year CD
Specifically, Clark has recommended that you park your money in five-year CDs. While the getting was good over the past several months, times — and rates — are a-changing!
“Now, as I feared, the interest rates on those longer-term CDs have dropped, dropped, dropped,” Clark says. “Not way down, but it’s definitely dropped.”
That’s why if you’re looking for a safe place to park your cash, Clark wants you to open a five-year CD while interest rates are still favorable.
Why Are Interest Rates on CDs Going Down?
“Why?” Clark asks. “Because of the favorable inflation reports lately.”
According to a news release on the Consumer Price Index, which the U.S. Bureau of Labor Statistics publishes monthly as a way to gauge inflation, prices around the United States have started to ease a bit.
“The index for all items less food and energy rose 0.2% in June, the smallest one-month increase in that index since August 2021,” the release says. “Indexes which increased in June include shelter, motor vehicle insurance, apparel, recreation, and personal care. The indexes for airline fares, communication, used cars and trucks, and household furnishings and operations were among those that decreased over the month.”
Clark says if things keep going accordingly, it seems that the brutal inflationary cycle we’ve just endured may be a thing of the past. “Fortunately, it was short-lived, and now so many things are actually cheaper than they were a year ago,” he says. “Other things have stayed more expensive.”
“So, now because the psychology of brutal inflation has been broken, even though it’s not been tamed completely, the trend is our friend,” Clark says. “Five-year CDs were paying in the 5s when I talked about these some months ago. Now the best you’re going to do is 4.65%, 4.75%, something like that shopping around.”
What Are the Best 5-Year CD Rates?
Looking for some five-year CDs? Just as a snapshot sample, let’s compare the savings rates on a five-year CD right now at a “giant monster-megabank,” as Clark calls it, one of Team Clark’s best online banks and one of his favorite brokerage firms.
Rates as of July 24, 2023
As you can see, Fidelity and Ally Bank, the brokerage firm and the online bank respectively, offer the two best rates on a five-year CD while, Citi, the big bank has the worst rates.
How To Shop for 5-Year CDs
“So there are two basic ways to shop,” Clark says. You can either do the ladder strategy, “or you’re just going to ‘go long’ with your money,” Clark says, referring to the approach of keeping your money in a CD over several years.
With the ladder strategy, Clark says, you divide the money that you’re willing to put aside into CDs into five equal piles:
- 20% in a 1-year CD
- 20% in a 2-year CD
- 20% in a 3-year CD
- 20% in a 4-year CD
- 20% in a 5-year CD
“So you’ll have access to 20% of the money you’ve stashed into a CD every 12 months,” he says. “And when that 12 months comes, you can decide what you’re going to do with it at that point.”
As your money matures with a CD ladder, you can:
“With a classic ladder, every year when 20% of your money becomes available, you put it back into a new CD, but the way the interest rates are going to curve a year from now, that might not be the best strategy,” Clark says.
Instead, you may be best served by locking in a 5-year CD now to get the best rate and not get stuck re-shopping for CDs in the coming years when rates are likely to be much lower.
Where To Buy 5-Year CDs
“The best way to buy CDs that are FDIC-insured is actually through Vanguard, Schwab and Fidelity,” Clark says. “They will place them through wholesale channels, getting you potentially more money than you can get on your own.”
“That is the smartest way to do it, but it may not be what you’re comfortable doing. You may want to have a direct relationship with whatever bank you’re putting the money in CDs, instead of through Vanguard, Schwab and Fidelity.”
One of the great savings opportunities we’ve had through this cycle of higher inflation has been much better rates on interest when we park our money. Because inflation is on the way down, Clark wants you to seize the day and take advantage of better-than-normal rates on 5-year CDs.
“There’s a real advantage as inflation continues to bend lower for you to lock in money that you know you’re not going to need in the next five years at as high a CD rate as you can,” he says. “And trying to lock that in right now is a really good idea.”