Certificates of deposit (CD) offer you an opportunity to earn more on the money you save by agreeing to leave it in the bank for a set period. In return, financial institutions reward you with higher rates of interest.
Money expert Clark Howard says that one of the best ways to earn a higher return on your money right now is to choose a long-term CD.
Why This Is the Time To Choose a Long-Term CD
To entice investors, financial institutions typically raise CD rates higher than those of traditional savings accounts. This earning power encourages people to leave their money in CDs for longer periods of time, or terms.
While you have the option of choosing CDs that have terms from a few months to several years, Clark says with inflation projected to slow even more over the coming years, a long-term CD makes the most financial sense. But what term should you specifically choose?
1. Consider a 5-Year CD
“The smart money looks at 5-year CDs,” Clark says. “The inflation trend is going down, down, down. It’s still too high, but it’s actually going down.”
Although one-year CD rates are typically paying at a higher rate than the five-year variety, Clark says the latter will ultimately give you the best return. Here’s an example:
If the best rates on five-year CDs are capping out at 4.5% and one-year CDs are paying as much as 5.5%, “you’re thinking, ‘Why would I tie money up for five years at 4.5% when I could tie it up for one year for 5-point something?’”
“The reason is the inflationary trends and the slowing economy suggests that the odds really favor that CD rates are going to be a lot lower,” he adds. “And the five-year CD gives you the ability to know that for the next five years, you will earn 4.5% more or less, depending on where you go — 4.5% FDIC-insured is great!”
What Are the Best 5-Year CDs Right Now?
This is just a snapshot of the savings rates for a five-year CD with some of the top financial institutions, including a few of our best online banks.
Bank 5-Year APY
Ally 4.10%
Capital One 4.10%
Discover 4.00%
Fidelity 5.05%
Vanguard 5.75%
Rates as of October 31, 2023
2. Look at Laddering
When it comes to CDs, Clark is a fan of the laddering strategy, which allows you to earn money at different intervals based on when the CD expires.
“You divide your money into equal piles of one-year, two-year, three-year, four-year and five-year CDs,” Clark explains. “And then you’re splitting the difference. You’re getting some really, for savings, a long-term thing for five years and then each gradient back to one. That would be the way to split the difference.”
Clark says with a CD ladder, you cover all your bases in case your returns aren’t as profitable as you think they will be. For example, since experts are forecasting a slowing economy in the short term, it makes sense to lock in attractive rates now because the Federal Reserve will likely make rate adjustments that won’t be as beneficial to those trying to park their money in a savings vehicle.
Read our guide on the laddering strategy for CDs.
3. Go To a Discount Broker
For decades, Clark has advised that you buy CDs through a discount broker, like Charles Schwab, Fidelity, or Vanguard. This is because traditional banks tend to offer two rates: one on their wholesale side and one on their retail side.
The banks “take advantage of their most loyal customers that go direct to them to buy a CD and offer a better deal through discount brokers, because they’re trying to grab what’s known as ‘hot money,'” he says.
Advantages of Buying CDs Through a Discount Broker
Clark explains that there are two clear advantages of buying your CDs through a discount broker vs. a bank:
- You’ve got magnified FDIC insurance. “Because through the discount broker, they can place your money with so many institutions, you have millions of dollars of FDIC insurance coverage,” Clark says. “Meanwhile, with a single institution, you only have a quarter-million insured through the FDIC.”
- Better rates: “Discount brokers are able to get you the best rates; better than you’re likely to be able to find on your own.”
Final Thoughts
Clark wants you to look into buying five-year CDs right now to capitalize on the attractive rates while they last. And no matter what you do, don’t buy CDs directly from a bank; buy from a discount broker instead.
Instead, Clark wants you to deal with the top discount brokers. Take a look at the following firm reviews at Clark.com:
“That’s where you’re going to get the best deals — FDIC-insured — on your CDs and on your savings as well,” Clark says.
