Here's a quick rule of thumb to see if a certificate of deposit is worthwhile. Take the average of the current interest rate of your savings account and the predicted rate of the savings account when the CD would mature. If the current CD rate isn't above this, you would be better off keeping your money in the savings account.
The problem is that you have to take a guess what the savings account rate is going to be when the CD matures. For terms of over one year, this can be difficult. Refer to my chart comparing saving account rates with the Fed funds rate over the last year. You can see that the savings account rates have followed Fed funds rate fairly consistently. This website has the history of the Fed funds rate since 1990. It looks very likely that we'll see the Fed funds rate increase to 4.75% in the March 28th meeting, and it's starting to look more likely that the rate will increase to 5.00% in the Fed's May 10th meeting.
Here's an example of applying this CD rule of thumb:
Last April I opened a 11-month CD paying 3.75% APY. That may look like a mistake now, but compare this to what would have happened if I had kept the money in EmigrantDirect:
EmigrantDirect rate changes over the last 11 months:
April rate = 3.25%
July 20th = 3.50%
Sept 20th = 4.00%
Jan 26th = 4.25%
Assume rate remains the same into March
The average APY can be computed as follows:
3 months at 3.25%
2 months at 3.50%
4 months at 4.00%
2 months at 4.25%
Average = 3.75%
So in this example, the 3.75% APY 11-month CD that started last April approximately equaled the money earned from an EmigrantDirect savings account. Also note that the actual EmigrantDirect average equals the average of the initial and ending APY (3.75%).
So in the previous post, I noted a 5.50% 18-month CD from a credit union in Washington State. Is this term too long? First assume you don't care about liquidity. Next, try to estimate what the interest rates of savings accounts will be 18 months from now. I would take a guess at 6.00%. Assume you keep your money in HSBC's online savings account and the rate doesn't drop in May. Then the average rate by keeping your money in HSBC would be 5.40% over the next 18-months. So in this case a 5.50% 18-month CD may make you more money.