3 smart CD moves to make before the next rate cut
After a four-year period in which interest rates hit record lows and then rose to decades-highs, the Federal Reserve started cutting interest rates again in September. A half a percentage point cut, sparked by cooling inflation numbers, was issued on September 18. And with unemployment and inflation declining in September, too, additional cuts of 25 basis points each look likely for the next two Fed meetings in November and December.
While this is welcome news for borrowers, it will detract from the big returns savers have been accustomed to in recent years. This is particularly true for those who have opened or are considering opening a certificate of deposit (CD). That said, CD interest rates haven't declined so dramatically as to render these unique savings vehicles unworthy. Savers can still earn hundreds and potentially thousands of dollars with the right CD account – even now.
But there are some smart CD moves savers should make now, before the next rate cut, to earn that big return. Below, we'll break down three of them.
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3 smart CD moves to make before the next rate cut
While CDs are still a safe and predictable way to earn a substantial return on your money, this high rate cycle could soon be coming to a close. Savers who have yet to take advantage, then, or those considering another account, should make the following moves now — before the Fed takes additional action:
Determine your budget
The more you deposit into a CD the more you'll earn. That simple calculation, however, doesn't account for any early withdrawal penalties you'll need to pay if you withdraw your money prematurely. These penalties range from lender to lender but they can easily negate any earnings you've accumulated to that point. So, first, determine your budget. Figure out precisely how much you can afford to deposit and for how long you can lock it away. Once you have this amount and length of time (CD term), determined, you'll be ready to take next steps.
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Shop around for lenders
Don't just head to your local bank branch to open a CD. Often, the best CD rates and terms are found with online banks versus those with physical locations. But even all online lenders are not the same as some will require higher minimum deposits or other requirements to earn a high rate. So shop around for lenders to find one offering the best rates for the amount of money you're comfortable depositing. And be sure to understand the early withdrawal penalties and any other fees or maintenance costs that could affect your returns before getting started.
Open a long-term CD
A long-term CD will mature anywhere between 18 months and 10 years. Once you've determined how much money you can comfortably afford to deposit, consider one of these accounts instead of a short-term one now. Currently, short-term CDs have slightly higher rates than long-term ones do. But those accounts will mature in just a few months, at which point rates will likely be lower. But long-term CDs have competitive rates now (in the 4% to 5% range), allowing savers to earn big returns for years to come, even if the larger rate climate cools during that time frame. And because of the locked rate nature of these accounts, you'll be able to determine with precision your exact earnings upon account maturity.
The bottom line
Rate-cutting action on behalf of the Federal Reserve should spur savers who haven't take advantage of the current high rate climate (or those who want to continue to) to make a move now – and they should do so with a CD. Specifically, savers should determine their budget in order to deposit as much as they can comfortably afford. But they should also shop for lenders to find one offering the highest rates, specifically for long-term CDs, which can help savers weather what appears to be a cooling rate climate.
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