Why you should put $5,000 into a long-term CD this October
For savers looking for a safe and effective way to take advantage of a higher-rate climate, there have been multiple options to choose from in recent years. From high-yield savings accounts to certificates of deposits (CDs) to money market accounts and even high-yield checking options, there were multiple ways to earn a substantial return on your money with little risk.
But the interest rate climate is changing again.
The Federal Reserve, prompted by a drop in inflation, cut its federal funds rate for the first time in more than four years in September. Additional cuts now appear likely for November and December, too. And while this will be a boost for borrowers saddled with higher interest rates, it could cause the benefits of the aforementioned savings vehicles to quickly decline. Understanding this dynamic, then, savers may want to act aggressively. One way to do so is by putting $5,000 into a long-term CD this October, while it's still advantageous. Below, we'll detail three reasons why you should strongly consider this move now.
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Why you should put $5,000 into a long-term CD this October
Not sure if it makes sense to open a $5,000 CD this month? Here are three reasons why it could be the right decision for your money.
Interest rates on long-term CDs are still high
Interest rates on CDs haven't dramatically changed from where they were a few months earlier, despite the rate trends. But that doesn't mean they'll remain this high for much longer, either. So act while the opportunity is still available. You can open an 18-month CD with a rate of 4.40% right now. 2-year CDs, 3-year CDs and 5-year CDs all have comparable rates, too, if slightly lower.
But if rate cuts are issued in the months to come — or economic data is released that shows rate cuts to be more likely — returns on these accounts could decline in advance, even before a formal Fed action takes place. So don't wait for that to happen.
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You'll earn a high return even as rates fall
High-yield savings accounts have rates comparable to CDs right now, as do some other accounts. However, the alternatives often have variable interest rates, which can and will decline as the overall rate climate does. CD rates, on the other hand, are fixed, allowing savers to earn the high rate they lock the account with today for the full term of the account.
With a long-term CD, that could be anywhere between 18 months and 10 years. That said, you should only deposit an amount that you can easily afford to leave in the account for the full term or you'll risk having to pay an early withdrawal penalty to reopen the account.
You can earn hundreds of dollars or more
Sometimes it's easier to determine the true value of a financial product by calculating the exact return you stand to make. And that's easy to do with a CD since the rate is fixed. If you open a 2-year CD with a rate of 4.20%, for example, you'll earn approximately $483 on your $5,000 deposit. If you keep the money in longer, you'll make even more. A $5,000 5-year CD at 4.35% will leave you with a profit of around $1,187. Calculate the numbers in advance and shop around for lenders online to determine exactly how much you could make by acting now.
The bottom line
Sure, interest rates looking to be heading downward, but they haven't yet dropped enough to offset the benefits of a long-term CD. By acting now, savers can still lock in a high rate and they'll keep it long-term, even as the overall rate climate declines. They'll also potentially earn hundreds of dollars (if not more) with a $5,000 deposit into the right account. But the the timing here is critical to get right. As interest rates are cut, and likely before then, lenders will start reducing their offers on accounts like these. So it behooves savers to act before that happens.
