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Deposit Account Predictions and Strategies for 2016


Last year many economists were predicting a Fed rate hike in June. They were off by six months. The Fed rate hike finally came, but it wasn’t until December. There are two things to note from this. First, it’s very difficult to predict interest rate changes. Second, there has been a long history of delayed rate hikes. It’s a good idea to remember these two things when thinking about your strategy with the money you want to keep in deposit accounts.

The difficult question for 2016 is how fast will the Fed increase rates. The Fed has made it clear that they’re planning only "gradual increases in the federal funds rate," and this depends on the economy improving as they expect. Fed officials have suggested that gradual means around four 0.25% rate hikes this year.

Based on minutes of December’s FOMC meeting, the Fed may be more gradual than this. As economist Tim Duy mentioned in his Fed Watch blog regarding the minutes, "the inflation situation is making FOMC members nervous and thus holding them back from a more aggressive path of rate hikes." Higher inflation will depend on improvements in the job market, and that is showing signs of improvement. The December employment report that was just released was strong. That increases the chance of four Fed rate hikes this year, which is probably the best case scenario for savers.

In a rising interest rate environment, it’s tempting to disregard long-term CDs. No one wants to be locked into low rates as interest rates rise. The alternative is to keep your money in savings accounts and short-term CDs. You can benefit more quickly when interest rates rise, but you lose out while you wait for higher rates. Since rate hikes will likely be only gradual at best, I don’t think it’s wise to give up on long-term CDs. CD ladders still make sense. Below are two CD ladder strategies that can help you deal with a rising rate environment. I described these two strategies last year, and I think they still make sense today.

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 how fast rates 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 slowly increase, 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 exception would be when you can find good short-term CD deals (like the 12-month CD deal at XCEL Federal Credit Union).

If you’re trying to find the best mix of CDs, savings accounts and reward checking accounts, give this tool a try.

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.

If you’re trying to find the best mix of CDs, savings accounts and reward checking accounts, give this tool a try. The tool is called "Where to (Safely) Grow Your Cash". You enter your state, your savings amount and your saving timeframe. The tool will then provide several options that include CDs, savings accounts, reward checking accounts, and various combinations of all three. You’ll have to decide on the best one for your needs. That will depend on factors like your need for liquidity and your amount of effort.

Bottom Line

As you think about tweaking your CD ladder strategy, it’s important to remember the two points that I mentioned at the beginning. It’s very hard to predict future interest rates, and rate hikes may take longer than you expect. Long-term CDs look less appealing with rising rates, but they can still be good deals if you look at the alternatives. That doesn’t mean you should keep everything in long-term CDs, but it may not be wise to keep everything in savings accounts. The right mix can be the best option.

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Previous Comments
  |     |   Comment #1
Thanks Ken, I was in the process of deciding what to do when I stopped to check the site and read your article.
  |     |   Comment #2
This is what the FED did and it should scare the pants off of you.

Feeling good?
  |     |   Comment #3
My point was/is that anyone who trusts the FED is nuts. They manipulated the stock market on the BACKS OF SAVERS, like you. Yes, frugal people like yourselves were sacrificed on the FED altar to ensure "people felt good" as a result of a phone "wealth effect" resulting from a goosed stock market. Now, the poor suckers with trillions in untouchable 401k's are going to get fleeced...again.
  |     |   Comment #4
For over a 100 years the Fed has had its mandate...that could be good or bad and everything in between.  But unless/until Congress and the President change that course of action, "get over it."  Learn to live by the current governance structure.  The economy did not go into a Depression as a result, in part, due to the Fed (the Republicans and Democrats were also prompt to pass legislative action in 2008-09)  While I and most on this blog have not seen too favorable rates, "most" think that saving the republic from a 1930s style Depression is better than the alternative of going through that again.  Save more and plan accordingly!
  |     |   Comment #9
Commenter #4, speak for your self.   Some of what you say may be true, but I do not agree with all you claim.  The so called "great recession" was a depression for many and wouldn't have lasted nearly as long if the Fed hadn't manipulated the markets, left the big financial institutions and the country takes it's lumps (which Wall Street brought on itself) and  our country would have been much better shape today than it is.
  |     |   Comment #32
Labels are labels...but the fall out for the overall economy in 2008 et al was nothing compared to the collapse in 1929
  |     |   Comment #44
Well said.  We do not have an economic policy, we have a monetary policy.  The FED is attempting to pass economic power (money is ephemeral) to the mega-powers by cutting ecomic power from the poor by trying to create inflation.  Inflation is just a wealth tranfer system: from poor to rich.

What's really scary is that as ****ed up the FED is, the foreign central banks are worse.
  |     |   Comment #45
Inflation control was always a mandate...nothing new.  Economy in this day and time grows in part by have a growing currency AND mild inflation with Fed controlled rates (and a do nothing Congress...specially those that don't want to pass anything that may get a signature from the current president)...look at Japan where it has been "bad." 
  |     |   Comment #31
So the FED states they promoted massive speculation and risk taking by printing up trillions.  This is going to end ugly!  The FED members should really be all tied to a whipping post for this.  
John Sears
  |     |   Comment #5
I think CDs broken down in units of perhaps $10K each on a $100K investment gives you leeway on breaking only part of it when you need it.  Like you say, we don't know how interest rates will rise.  Based on one of your charts, with the current 2.25% 5 year rate, you start doing better at 14 or 15 mos. than a 1.3% 1 year CD.  Plus, you can simply let it sit there.  When the 1 year expires, then you will want to put it somewhere and tie it up again.  Just my two cents.
  |     |   Comment #6
Seems that a least twice a years some Credit Union offers CD's that are paying 3% for 3 - 5 years for the past couple of years.  If you follow Ken's advise to open a 5 year with an institution that has a low EWP I would open a 5 year at such a low rate.
John Sears
  |     |   Comment #7
I have always found Credit Unions tricky, to say the least.  I deliberately didn't go into PenFed's 3% awhile back because of the 1 year penalty fee.  Still, if I opened a 3% with the maximum of $250K that's an add'l $1,875 PER YEAR over the current 2.25%.  Ken mentioned I believe a NASA credit union; with a 4 year strong rate, that works out to a much better 1+ years if you broke it.
  |     |   Comment #21
I would go with the 3% CD. You should have gone for the Penfed CD at 3% that was available a couple of years ago. Penfed is easy to join. Please define "tricky". The problem you may encounter with an early withdrawal is in the deposit agreement , an early withdrawal may be at the banks option to allow you to make an early withdrawal or they can make changes to the agreement.. No one knows what rates will be in the next few years. The stock market is dropping and the Chinese stock market has had some major losses. Rates may not go up that fast.
  |     |   Comment #8
Keep on laddering with the best rates available at the time.
  |     |   Comment #10
I think that's the BEST way to go. 

And forget all the fuss about trading CDs like stocks and bonds when rates change.  Then there is no need to be concerned about what the early withdrawal penalties are.
  |     |   Comment #11
You're right,  people want to play the CDs like they are stocks and then they wonder why the banks are raising their early withdrawal penalties.
John Sears
  |     |   Comment #12
I seem to be in the minority here, as I don't fully understand laddering.  If the highest 1 yr. rate now is 1.25%, and rates don't go anywhere, if you wait two months you are immediately getting a better return with a 2.25% 5 year CD by waiting only 2 more months.  The longer you wait, the more your money increases.  You are basically locked in with a 1 year CD, so why is it any different waiting one full year to break a 5 year CD?
  |     |   Comment #13
With a 1-5 year ladder, after five years all my accounts are 5-year CDs maturing yearly and reinvested into another 5-year CD. I don't have to worry about an EWP,  while taking advantage of the best rate offered at the time.
  |     |   Comment #14
I don't think the bank or credit union gives you the early withdrawal option so you can game them, I believe the early withdrawal is more likely meant for people that really need to break the cd for a better reason. I ladder my CDs and right now my ladder goes out 5 years but I buy CDs for 3 years and fit them in.. whatever is the highest rate. I just got some Navy Federal 2.5% 30 months and fit them in the middle of my ladder.
  |     |   Comment #16

"Laddering" is a CD investing strategy used by people who were not alive, or were not sufficiently old to be aware, back when inverted yield curves were commonplace.  Candidly, a few laddering enthusiasts do not even know what an inverted yield curve IS!
  |     |   Comment #19
When CD laddering came into being and the initial reason for that strategy is irrelevant.  CD laddering is still a successful strategy today, and going forward, for people who are very risk adverse. 
Yield Hunter
  |     |   Comment #15
I'll go for yield every time vs waiting for what 'could' happen.   If it 'doesn't' happen, you'll get too far behind to make up for what you 'could' have earned.  There is way too much risk in that strategy.

I look at it like this.  Lock up longer term for the highest yield possible [5-10 yrs].  If things don't get much better,....you WIN because the rates didn't get much higher    If the rates do get better,  you always have the option to take an EWP and get out.  If I were to actually  do this, that means it was a VERY good day as I would be locking up to a nice high rate.  Much, much less risk.
  |     |   Comment #17
I cut my teeth buying individual bonds, not CDs.  So I concede this will not apply if your CD has a sufficiently lenient EWP.  But about 50 years ago I discovered the following:

When you buy a bond you, in effect, lock in the interest rate at time of purchase.  No, you would respond, a sale of the bond when rates rise and reinvestment of the proceeds will enhance YTM on that money.  But that is not what happens, because when rates rise the initial bond purchased is diminished in value so you have fewer dollars to reinvest at the higher rate.

With CDs things are less precise.  It might be possible to improve upon initial yield expectations, or not.  It depends on the EWP, of course, and also upon when (during the lifetime of the CD) you want to turn it in and upon how rapidly interest rates shift.  In addition, Ken's repeated warnings about the perils of early CD withdrawal are not merely justified, they are pivotal.  Illiquidity is always pivotal.
  |     |   Comment #18
And even less risk if you have a CD ladder.  If rates do go up, as each rung of your CD ladder matures,  you then renew it at then the highest rate.  No early withdrawal penalty loss.
  |     |   Comment #20
There are three good reasons to buy CD's. Safety, safety and safety. Ok, there's a fourth...interest.
John Sears
  |     |   Comment #22
When I came into my inheritance I knew little about money; my Dad had a 5% MM with Vanguard.  I read in Money Magazine of Ally Bank's 2 mo. penalty on any term of CD.  I then read Allen Roth's approach of a $100K investment broken down as ten 10K units.  Using my brother as a joint holder on half of it, I locked up over $600K at rates that varied from 2.37% to 2.39%.  Each month, I receive what I consider a second Social Security check:  the interest from these Ally accounts.  So far, I have only had to dip into the principal twice, $20K total.  Penalty was about $39 each.  I don't see anyway possible that laddering this amount 4 1/2 years ago would've made any sense.  Obviously, I'm still missing something about the notion of laddering.
  |     |   Comment #23
Laddering is for sissies.

My own strategy I call "jumping".  When I see an exceptional rate (whatever the term) I jump on it.

Between jumps the liquid pools leave me refreshed and ready.

Carrying that heavy ladder, - and then step-by-step-by-step-by-step?

Forget it.  I like to move, use my wits, stay light on my feet, - and adjust tactics as I go in response to immediate circumstance.

I pass you people with the ladders frequently, - lumbering along, eyes on the pavement, shaking your heads at the smart and the nimble (but still safe).

It's pathetic.
  |     |   Comment #24
My guess is some of those sissies you are talking about probably have a portfolio that would overwhelm your jumping cd program.
  |     |   Comment #25
The reason that ladder is so heavy and cumbersome for you is because we who ladder CDs are sitting on top of that ladder. 
  |     |   Comment #26
When I started buying CDs I would always buy the 5 year because it was the highest and then after a few years it developed into a ladder on its own, I have CDs going out to 2021 and I have 1 coming due in a week..... I always have CDs coming due, probably 5 a year on average. I buy what ever is the highest rate that makes sense. 
  |     |   Comment #27
Your average rate of return over the last five years is what?

That's what counts.
  |     |   Comment #28
no, the point is he hasn't lost any principal in the last 5 yrs.
  |     |   Comment #29
I don't know what my cd ladder averaged the last 5 years I could guess but like you said it doesn't really matter to me. First of all my wife and I still work but I only look at a couple things.... did I have to touch principal and the answer is no. The second thing  would be as long as my net worth is up every year, I'm happy..... that would be a yes also. I don't only invest in CDs but they do make up the biggest % of my investments.
  |     |   Comment #30
My cd ladder is currently earning 3.16% overall.  At one time, it was more, but as they mature I am having to settle for lesser rates than before.  Anyway I still have a couple of cd's that still have 3 more years until they mature (one is earning 5% and another 5.7%).  And I laddered to get that rate instead of jumping for it.
  |     |   Comment #33
That is pretty good, mine is at about 2.85%...all my 5%ers were gone a long time ago.
  |     |   Comment #34
For #30 and #33, what percentage, if any, of total funds are in straight cash, i.e. not at an institution that could close their doors on a dime...what % in Bank of Mattress or equivalent?
  |     |   Comment #36
I try not to think that negatively.... if the banks fail that I have my CDs in or my cash in then it won't matter how much cash you have under your mattress because it won't be worth anything either imo.
  |     |   Comment #38
Yours wouldn't be but others are okay
  |     |   Comment #35
I'm dubious you have CD's that mature in three years paying the rates you state.  Certainly if they are 5 or 7 year Certificates there is no way, - it would mean you established them only 2 or 4 years ago when those rates were impossible.  Even the best 10 year CD's (opened 7 years ago in your case if that's what they are) paid considerably less than 5% in 2009.  Care to say what FI you have these with and what the term is?
  |     |   Comment #37
Maybe he bought 10 year CDs and now his ladder is down to 5 years... just guessing.
  |     |   Comment #39
Yes, that very well could be.  I had a 10 year CD ladder for years, with 1 CD maturing every year.  Several years ago I cut that ladder down to a 5 year CD ladder  with one CD maturing every 6 months.  My only mistake was that I cut the 10 year ladder down to 5 a little too soon.  I have no regrets though and am satisfied with the results being interest rates are still in the dumps.

For the time being, I am in a "holding pattern"  with my 5 year CD ladder.
  |     |   Comment #40
To support anonymous in post 30, he's probably took out a 10 year with Capital One at 5.70. I funded one back in Dec08 and wish I had a crystal ball to know the FDIC would permanently move coverage to 250.

If someone was a bit diligent, they could see this rate in the 2008 archives, in Ken's weekly round up of rates.
  |     |   Comment #41
In 2006/2007 rates were available at 5.4% with brokered rates a bit higher.
  |     |   Comment #42
From Anon. 30:  10 year cd ladder is the answer.  I was doing a 5 year ladder, but when 10 year rates started getting pretty tempting, I switched to a 10 year ladder to get better rates.  I am now going back to a 7 year ladder.  However the only time I do not ladder is if there is a shorter term cd that gets as good or better rate than the longer term, I go for that higher shorter term rate instead.
  |     |   Comment #43
It's best to lock-in the best rates you can find if this comes to fruition...
Money market futures are starting to price out the chance of multiple rate hikes by the Federal Reserve this year, with only a roughly 50 percent chance of a second hike priced in. At the start of the year, futures were fully pricing in two rate increases.The market is far from convinced that the Fed is going to raise rates in March, after implementing its first rate hike in almost a decade only last month.
  |     |   Comment #46
There's another strategy: diversify out of the USA. I'm currently investing CDs in a country where the central bank 1-year discount rate is currently 6.89% p.a. and I'm earning 7.5-9.5% p.a. at private banks.  
  |     |   Comment #47
What currency?
  |     |   Comment #48
and how politically stable is the country?
  |     |   Comment #51
The country is Ecuador, which became a constitutional democracy since 1979, over 36 years ago. The government's deposit insurance covers $32,000 so my CDs are 32k at each bank and I withdraw interest every month. 
  |     |   Comment #50
The currency is USD.
  |     |   Comment #52
It's legal tender and the only official currency of the country.
  |     |   Comment #49
#46 - Why tell only half of your story?
  |     |   Comment #53
I hesitated to report on this as it's not something that can be done by anyone as the banks don't accept offshore deposits. You'd have to have a connection to the country in order to own accounts. I'm able to do that as I got a work contract in the country. 
  |     |   Comment #54
Wait until you try to convert the money to US
  |     |   Comment #55
No need to convert. The CDs are in USD.
  |     |   Comment #56
And, again, the bank is?

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