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Deposit Account Predictions and Strategies for 2015


Will 2015 finally be the year in which the Fed starts to raise interest rates? That’s the big question that savers are asking. If the Fed does begin to raise interest rates, it can still be a long wait for savers before rates rise to levels we saw back in 2006.

With the chance of rate hikes increasing, savers will have to decide if they should hold back on long-term CDs. It can be frustrating to have money in long-term CDs as interest rates rise. However, it can also be frustrating to have money that you don’t currently need in a low-rate savings account as interest rates stay low. That money could be earning much more if it were in a long-term CD. Many savers have probably experienced this problem in the last five years, and it’s possible the same thing could happen this year.

So the first question is will 2015 finally be the year that we see a Fed rate hike? This Calculated Risk blog post reviews this question and offers a prediction:

If the unemployment rate declines to 5.5% or so in the May report, and core inflation continues to move upwards towards 2%, then a June rate hike seems likely.

For a June rate hike to occur, the Fed will very likely be modifying its language in its statements in the next three FOMC meetings. If the language doesn’t change and the words "considerable" and "patient" remain in the statements, the first rate hike will likely be delayed.

Even when the Fed does its first rate hike, there could still be a long period before the Fed increase rates to normal levels. As mentioned in the CR blog post, it’s likely that subsequent rate hikes will be gradual. Rates will likely be close to 1% at the end of 2015.

Since it’s unlikely we’ll see a fast ramp-up in rates, I don’t think it’s wise to give up on long-term CDs. If you keep too much in savings accounts waiting on higher rates, you could lose out on higher interest rates now available in long-term CDs. Many savers have been in this boat for the last few years.

Standard CD Ladder with Mild Early Withdrawal Penalties

If you want to keep things simple, stick with a standard CD ladder. With a standard CD ladder, you don’t have to guess about when rates will rise and how fast they will rise.

If you want to ease worries about being stuck in a long-term CD as rates rise, look for CDs with mild early withdrawal penalties (EWP). I consider a mild EWP to be no more than six months of interest for a 5-year CD. You can compare the effective yields of CDs after the early withdrawal penalties by using our CD early withdrawal penalty calculator. Be aware that there are risks on depending on an early closure of a CD ( see article).

Barbell CD Ladder with Internet Savings Accounts and/or Reward Checking Accounts

If you don’t feel comfortable with long-term CDs as interest rates could be on the verge of increasing, you may want to consider a barbell CD ladder. In this approach about half of the deposit accounts are in long-term CDs and the other half are in online savings accounts and/or reward checking accounts. Short-term CDs are typically used instead of liquid accounts in a barbell CD ladder, but since short-term CD rates are so low, I think internet savings accounts and/or reward checking accounts make more sense.

The more you keep in internet savings accounts and reward checking accounts, the more work will be required. Reward checking accounts offer the best rates, but these require a lot of debit card purchases. And since all have balance caps, you may need multiple reward checking accounts. Even if you find an internet savings account or a reward checking account with a top rate, it doesn’t mean it’ll last. Be prepared to move that money when the bank cuts the rate and/or balance cap. Very few banks remain rate leaders over the long run.

My main concern with having too much money in savings accounts is that it will be hard to know when it’s time to start moving into CDs. As rates start rising, there will always be the question about how much higher they will rise. You may never want to lock into a long-term CD. As we’ve seen in the last six years, that can be costly.

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Shorebreak   |     |   Comment #1
Great summation regarding the conundrum savers face for yet another year. I agree, remain laddered in the cd portion of one's portfolio and don't try to outguess the Fed.
Anonymous   |     |   Comment #2
We are a credit based economy. Cash may be king in the individual household but it's not king in the economy. Credit is. Speculation is. Paper wealth creation is. Savers better get comfortable with the fact that their cash is simply not in high demand by anyone but themselves. Savers "highly value" their personal cash hoard and they expect others to do the same via interest rates. Savers are misguided. The modern economy rewards risk and speculation, often at the expense of thrift.

I recently considered financing a car loan through a CU where I have 150K invested in CD's at 3.04%. The 36 month loan rate would have been .99%. So, I loan my money at 3.04% while I borrow at .99% (yes, that's less than 1%). Being thrifty I put $1K into maintenance on a 14-year old auto with 185,000 miles. Maybe at 250K miles I reconsider that loan on a new model!     
Anonymous   |     |   Comment #3
"Credit, speculation and paper wealth creation" are seemingly wonderful until a bubble bursts and people scamper to the safety of bonds and cash. That's why a diversified portfolio is important. Everything has an element of risk to it.
Inforay   |     |   Comment #4
It is sad when a small group of individuals known as the "Federal Reserve" have such tremendous control over all of our lives.  The only reason equities have fared so well is, as Rick Santelli put it this morning on CNBC, because "there is no alternative" (he calls it T.I.N.A.)  Stocks are so overpriced because treasuries yield so little and people have nowhere to put their money.  This extreme low interest rate environment has been devastating to those of us who want to keep our money safe, and had been hoping to live off the interest in retirement.   When my older kids went to college, I was able to pay for it, from the interest incomes earned on their accounts. With my youngest, not so much. These last six years have been a severe punishment for us, savers.  I do hope 2015 will see a rise in interest rates, and more importantly an audit of the Federal Reserve and its members.
KK   |     |   Comment #6
It's called a saving glut.  Supply and demand....
Inforay   |     |   Comment #8
I would not complain if the present low interest rates were due to a savings glut.  I would appreciate interest rates being set by supply and demand.  The present low interest rate environment is due to intervention by the Federal Reserve which is deliberately acting to keep interest rates very low, regardless of supply and demand.
Anonymous   |     |   Comment #7
It's also very sad when a small group known as "bankers" can speculate and cause financial destruction.  The US history is replete with times as well as the banks continued attempt to disrupt their "freedoms" at the expense of everyone else!
Anonymous   |     |   Comment #9
The people we elect pass the laws that enable such behavior. Every cycle the voices of restraint and reason are always silenced, often by the very people who later complain the loudest.

Anyone looking to live a grand retirement from FDIC insured interest bearing CD's is fooling themselves. CD's are at best a means to preserve capital, not grow it. When inflation hits 6% I suspect we'll all be enjoying higher CD rates right along with higher everything.
Anonymous   |     |   Comment #5
USA is flooded from cash from individuals, banks, foreign investors, printing money (where do you think $1,4 trillions shortfall goes every year), not counting the money in loans and line of credits created by the banks.
Waiting for rates to rise will be a long and grueling time, if ever, and who is going to pay the interest on the $18 trillions of national debt if the rates go up, you and I will pay for it by way of new taxes or devalue of the dollar.
Anonymous   |     |   Comment #10
In the past six months I've watched as 10-year brokered CD's dropped from 3.4% to BELOW 3.0%. Many are now below 2.9%. I don't consider this trend positive. 
Anonymous   |     |   Comment #11
Today's 10-year Treasury Note only yields 2.12%. Even going out on the yield curve to a 30-year Treasury Bond yields only 2.69%. Evidently the bond market doesn't expect much out of any future rate rise by the Fed.
Anonymous   |     |   Comment #13
So what is new?  Same old rhetoric of comments.   And it will be the same for many years to come.  Face It.  The Feds have dug a big black hole with their interest meddling policy which we can not crawl out of.  Our national debt is too huge to ever  raise interest rates substantially.  Higher interest rates will bankrupt our if it isn't already. 

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