If you want to lock in generous rates on your cash savings for the next year or so, now may be the time to do it.
Yields on federally insured certificates of deposit are the highest they’ve been in years. The most competitive rates — offered by banks that operate mostly online — were recently as high as 5.66 percent for a one-year certificate, according to the financial site Bankrate.
Those attractive yields, however, may shrink in the new year.
Rates began to rise in 2022 from less than 1 percent after the Federal Reserve began increasing its benchmark interest rate, known as the federal funds rate, to tame inflation. (Banks generally follow the direction of the federal funds rate in setting rates on loans, savings accounts and C.D.s.) But inflation has been cooling, and the Fed recently signaled that it might cut rates in 2024.
That suggests that C.D. rates may fall in the coming months, analysts say. “This is a good time to lock in rates while they are still high,” said Ken Tumin, founder of the financial site DepositAccounts.com, part of LendingTree.
No one knows for sure, of course, if or when rates will fall, said Marcus Holzberg, a financial planner at Holzberg Wealth Management near San Francisco. “You could go in circles trying to time these things.”
Yet rates are already falling in some cases, Mr. Tumin said, particularly for brokered C.D.s, which are sold through brokerage firms rather than directly by banks. Rates also slipped in December on direct-sold C.D.s at some online banks, he said.
Still, many online banks are offering direct-sold C.D.s at rates of 5 percent or higher for 12 months or a similar term. Synchrony Bank, as of this past week, was offering a yield of 5.5 percent on a 15-month C.D.
“These rates may be as good as we’ll see for a while,” said Christine Benz, director of personal finance and retirement planning at the research firm Morningstar.
With C.D.s, you agree to lock up your money for a specified period in exchange for a guaranteed rate of return. They can work well for known upcoming expenses — say, a vacation next year or a child’s wedding, said Daphne Jordan, a wealth adviser with Pioneer Wealth Management Group in Austin, Texas. “Your money will work harder for you,” she said.
But if you need the cash for continuing or short-term expenses, C.D.s may not be the best option, financial advisers say. If you have to withdraw your cash early, you’ll usually pay a penalty (typically, several months of interest).
There are ways to buy C.D.s to allow more flexible access to your cash. Some banks, for instance, offer “no penalty” C.D.s, which allow you to withdraw the money early if you need it. They usually offer lower rates, however, than traditional C.D.s.
Another approach is creating a C.D. “ladder,” in which you divide up your cash and buy multiple C.D.s with staggered terms — with one, say, for six months, another for a year and the rest for longer periods up to five years. When the shortest-term C.D. matures, you can withdraw the money if you need it — or, if not, roll the money into a longer-term certificate.
In the past, longer-term C.D.s paid higher rates to savers in exchange for locking up their money for an extended period. But that’s not the case now. Many long-term C.D.s are paying lower rates than shorter-term certificates, a sign that rates are expected to fall as the Fed eases up on its fight against inflation. So a better strategy right now might be to create a shorter “step stool,” by buying C.D.s that run from six months to two years, said Cheryl Costa, a financial planner in Framingham, Mass.
Still, locking in a rate above 4 percent now on a five-year C.D. could be beneficial, given that the average rate on a five-year C.D. was 0.24 percent two years ago, according to Bankrate.
Before creating a step stool or ladder, savers should also consider whether they have the time to manage certificates at different banks with different maturities, Ms. Costa said. Unless you are moving a large sum of cash, she said, the effort may not be worth the extra yield.
For many people, Ms. Costa said, choosing a high-yield savings account may be the best approach — even if it means getting a somewhat lower return on your savings. The online bank Marcus, the consumer arm of Goldman Sachs, is offering 4.5 percent on a savings account, for example, and Ally Bank, another online-only bank, is paying 4.35 percent. You’ll need to link the savings account to your regular bank to transfer money in and out.
Here are some questions and answers about C.D.s and savings:
Why not leave my money in a high-yield savings account?
For emergency funds that you may need on short notice — say, for an unexpected car repair — savings accounts are a good fit. But banks can, and do, change the rates they pay on such accounts at any time, so that option could become less attractive if rates fall. That shouldn’t be a big concern, however, if your money is meant for emergency expenses, Ms. Benz said. For a rainy-day fund, she said, “the goal is return of principal rather than return on principal.”
What about money-market funds?
Many brokerage firms have been paying around 5 percent on money-market mutual funds, low-risk investment accounts. But money-market funds are not federally insured. And the rate on these accounts can change at any time.
Should I move more of my investments to cash, while savings rates are still attractive?
Paul Brahim, a financial adviser at the Wealth Enhancement Group in Pittsburgh, said he heard that question from clients eyeing attractive yields on low-risk cash vehicles. He said he generally advised clients to keep money in cash based on their spending needs for the next six months to three years, including a reasonable reserve for emergencies.
But if you move too much money out of long-term investments, Mr. Brahim said, market timing becomes more of a risk, and you could miss out on significant investment gains. “Cash is a great idea for everyone,” he said. “But it’s important to have a rational allocation.”
