3 critical CD account moves to make before interest rates fall
Certificates of deposit (CD) accounts have provided savers an opportunity to offset some of the negative effects felt by inflation and higher interest rates in recent years. While higher rates have caused the costs of borrowing to surge, they've also caused rates on CDs and high-yield savings accounts to grow exponentially. Now, it's easy to find a CD with a rate of 5% or higher. But the big returns savers have been earning on these accounts could soon fade.
With a consistently cooling inflation rate (it dropped consecutively in the last three months), the Federal Reserve is now openly discussing a cut to the federal funds rate. Frozen at a decades-high range between 5.25% and 5.50%, a reduction there will inevitably result in less attractive rates for savers. And with an interest rate cut appearing likely for September, savers still considering a CD account will need to be proactive to take advantage. But what steps should they take, exactly? That's what we'll break down below.
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3 critical CD account moves to make before interest rates fall
Still haven't opened a CD account but want to take advantage of today's elevated rate climate? Time's running out, so consider making these three critical moves right away:
Shop around
It's always important to shop around to find the best deal, but especially for CD accounts and particularly now, ahead of rate cuts on the horizon. By shopping around savers will improve their chances of finding the highest CD rate, possibly even without maintenance fees or early withdrawal penalties. But they'll need to start shopping immediately and be prepared to use an online bank versus one with physical locations (and less attractive offers).
So don't hesitate. Lenders closely follow the federal funds rate but changes don't always take place in tandem. If lenders start feeling like an interest rate cut is inevitable, they can (and will) start cutting CD rates in anticipation of that action.
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Calculate your earnings
The interest you earn on the CD you're planning to open will depend on three primary factors: the amount you deposit, the rate you secure and the term (or length) of your CD. To accurately determine which deposit amount and term is best for you, then, it's critical to calculate your potential earnings now.
There are multiple CD interest rate calculators available for use online and the lender you're considering should easily be able to determine your future earnings, too. That's because rates on CDs are locked for the full term, regardless of what happens to the larger rate climate. So you'll know exactly what to expect whether you choose a 3-month CD or a 3-year one.
Lock in the longest term possible
Once you've shopped around to find the highest rate and calculated your earnings you should try to stretch your budget by locking in the longest term CD possible. With interest rate cuts just weeks away and the potential for additional ones to come in the months and year ahead likely, it makes sense to skip that volatility by locking in a high-rate CD for the longest term possible.
And with options ranging from 18 months to 10 years, there's a variety of terms to explore. Just be sure to deposit what you can afford to part with for the full term, as an early withdrawal penalty on a long-term CD account could be costly.
The bottom line
The window of opportunity for this cycle's high CD interest rates may soon close, possibly as soon as this September. So those who haven't taken advantage of this unique savings opportunity should do so now by shopping around for high rate and using an online lender to secure it. They should also calculate the interest they stand to earn to determine the amount they should deposit and then proceed to lock in the longest term possible they can afford. That way, they can earn as much interest for as long as possible.
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