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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.
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?
“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!”
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.
Rates as of October 31, 2023
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.
“Let’s say we’ve truly broken the back of inflation in a year. When you go to buy a new CD a year from now, the rates may be much lower than they are now,” he adds. “So that’s an advantage of doing a ladder even today: The money you know you’re really not going to need for 60 months, put a meaningful amount into a five-year CD.”
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.
Clark explains that there are two clear advantages of buying your CDs through a discount broker vs. a bank:
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.
“This is a Never Rule,” Clark says. One thing never to do — unless you hate your money — is go to Bank of America, Wells Fargo, Chase or Citibank to buy CDs because they play you for a fool. They place such ridiculously low rates on their CDs. They’re taking advantage of you.”
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.
This post was last modified on November 1, 2023 6:34 pm
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