I reviewed some strategies to get better yields on liquid accounts yesterday. Today I'll review some strategies for certificates of deposit. As I mentioned yesterday, this record low interest rate environment is making it very difficult for those who depend on interest from their bank accounts. With rates so low, you'll want to take every opportunity to maximize the rates. The first decision for savers is how much if any of their money should go into CDs.
CDs or Savings Accounts?
Liquid accounts can be tempting when many have yields higher than 1-year CDs. But as we have seen over the last two years, savings and checking account rates can fall substantially. At least with a CD, your rate is locked until the CD matures. A good example of this was in 2007 when PenFed was offering 3-to-7 year CDs with 6% APY. During this time FNBO Direct was offering a savings account with a 6% APY and State Bank of Toledo was offering a reward checking account with a 6% APY on all balances. Locking your money into a long-term CD didn't seem as appealing as a liquid account with the same rate. Now FNBO Direct's savings account pays only 1.10% APY. State Bank of Toledo's reward checking account only pays 2.51% APY on balances up to $25K.
Of course the rate lock feature of a CD can be a downside when rates start to rise. The problem is that no one knows when this will be. So it makes sense not to put all your eggs in one basket when you decide about how much to put into CDs and how much to put into liquid accounts.
One common way to hedge you bets is to use a CD ladder approach. In this approach, your long-term CDs are staggered so some mature on regular intervals (i.e. every 6 months or every 1 year). If CD rates start to rise, you can slowly start rolling those maturing CDs into higher yielding CDs.
If you're just starting a CD ladder, the common approach is to start with short-term CDs for most of the CDs, and when they mature, you roll them into long-term CDs. With most short-term CD rates so low, you may want to consider just keeping that money in savings or reward checking accounts.
Early Withdrawal Penalties
Another important consideration for long-term CDs is the early withdrawal penalty. Instead of waiting for a long-term CD to mature before you buy a new CD with higher rates, you usually have the option to close the CD early. You'll have to pay a penalty for the early withdrawal, but if that penalty is mild, you could earn more than if you just wait for the CD to mature.
As many of the regular readers of this blog know, I've been writing a lot about long-term CDs with mild early withdrawal penalties. Two good deals continue to be the 5-year CD at Ally Bank and the 5-year and 7-year CDs at PenFed. I reviewed these CDs in this blog post and looked at effective rates if these CDs were closed early. As you can see in that post, you can earn more with these CDs closed early than you could with short-term CDs.
There are some potential risks with depending on the mild early withdrawal penalty on long-term CDs. I reviewed these risks in this blog post. One risk is that the bank could refuse an early withdrawal. Some banks give themselves that right in their disclosures. So it's important to review the bank disclosures so you're aware of any possible gotchas.
Tips to Earn More Interest on CDs
If you do decide to go with CDs, there are some basic steps that can help you get higher rates. First, remember that CD rates are negotiable. You often can get higher rates than the rates listed by the bank. This is especially true if you're a long-term customer at your local bank. If you request a higher rate, try to have rates of a few of the bank's competitors handy.
Another important step is to make sure you don't let CDs automatically roll over at maturity. This is especially true if your original CD was a special CD at any large bank. These special CDs are typically rolled over into standard CDs which can have very low rates.
If your CD matures and your bank isn't willing to offer a rate that's competitive, you should consider moving that CD to a new bank or credit union. When the CD matures, you typically have a grace period of 5 to 15 days in which you can close the CD without a penalty. However, some banks won't pay interest during the grace period if you close the CD. So if you decide to move your money, try to move it as soon as the CD matures.
For non-local banks, it can be problematic to receive the funds from a matured CD. Make sure you plan for this and check with the bank before the CD matures. It's not a good option to have the bank mail you the check. This can take one or more weeks. During this time the money isn't earning interest. A better option is a free ACH transfer to your other bank account. Unfortunately, not many banks provide this option. However, most will transfer the CD money to a liquid account that you have with that same bank. Once it's in that liquid account, you can then write a check or pull the money using the ACH service of another bank. Finally, a wire transfer is an option to receive the funds. However, there's almost always a fee for an outgoing wire transfer, but this fee may cost you less than the loss of interest while waiting for the check in the mail.
CDs may not have the appeal of online savings accounts or reward checking, but if you want to earn the most on your safe money, CDs shouldn't be dismissed. Hopefully, the above tips can help you make more on your CDs. If you have any tips, please leave a comment.