CD--1 year? 5 year? What would you choose?

[frugal saver]

I recently cashed out a CD and am planning on splitting it between 3 or 4 banks. I had originally been looking at the 4% rate for a 5 year CD.

But if interest rates start going up next year, I'd be better off with the 1-year CD for around 2.8% to 3.0%. Of course, if they go down, I could end up in worse shape next year.

What would you do? Any opinions on where interest rates are going?

[kork13]

Rates can't really go much further down.... The Fed rate has been sitting at next to 0% for the last 3-ish months, and most in general, banks have been slowing down their rate-slashing. I expect they'll sit low for a while, maybe as long as a year or so, then start coming back up.

Since it seems you're looking for safety (splitting between banks? Is that really necessary?), go for a 1-yr CD. If you can find a 1-yr CD for 3% (none of my 6 banks have any higher than 2%), I'd go for it. By the time it matures, I expect rates probably will be looking up (and even if they're not, they won't be much lower than they currently are).

[MonkeyMama]

I have to agree. I don't see the point in locking in a CD right now. There's really no upside. (1 year or less is fine - you'll get a bit of a premium most likely. BUt I wouldn't lock in more than a year. Maybe no more than 6 months personally).

[disneysteve]

I also wouldn't go long. Don't limit yourself to 12 months, though. Look for specials on terms a little shorter or longer than that. Sometimes banks will run a special rate on a 10-month that exceeds the 12-month rate. Or maybe the 15-month rate will be significantly higher than the 12-month. Shop around and find the sweet spot. I wouldn't go out past 18 months for the reasons stated. Rates are at rock bottom now. They can only go up.

[frugal saver]

Thanks for all your opinions. I found an 11 month CD for 3.0 at Connexus Credit Union, a 3.19 1-year CD at Melrose Credit Union and Alliant Credit Union has both a 3.0 savings account and a 3.0 1-year CD.

In response to kork13, I'm using different banks to stay below the FDIC limits, since the new higher limit is set to expire at the end of the year and I haven't heard it's been made permanent yet.

[buzz]

All the money being poured out by the Fed is going to lead to inflation. There will be nothing but lip service and ineffective token attempts to lower the inflation, because inflation will be the only way out of the staggering debt we are piling up. Get the picture?

[EEinNJ]

You can limit your interest rate risk by laddering CD's just as you would bonds. Then the issue is, considering minimum investment requirements, how much you put in each.

[Ima saver]

Well, I found one paying 4% , so I lock in for 2 years. I found another paying 3.75%, and I took that for 1 year. Right now, my bank is paying 3.1% for checking accounts but that is only promised til June 30th.

[poundwise]

With the present rate environment, there is no way I, personally, would lock in money for more than 12 months at a time. Though no one can say with certainty, I would think the smart money position is that rates will not be lower than they are now a year from now.

[blankcheck]

yeah, I'd say 1 year or less. If we're wrong a year from now and rates drop much lower, the problem won't be because we guessed wrong; it'll be that we're in much worse trouble than anyone suspected.

[boosami]

I'm tempted to lock in the higher rates offered by 5 year CDs. I can always do an early withdraw and reinvest if rates skyrocket because of inflation. I think the max penalty I've seen is 6 months of interest.

Here's an example with PenFed's current rates and simple interest. Rates are 1 year at 2%; 5 year at 4%. With the one year, I'll make $20 in 12 months. I make that much on the five year if I hold it for a year (making $40) but cash out early and pay the penalty (6 months interest = $20). I end up making $20 on either, but have a higher rate locked in with the 5 year if I don't cash out early. If the penalty is just 90 days, you made $30 on the early withdrawl 5 year--that's $10 more than you would have made with the 1 year rate. With actual interest, the result is even slightly better due to compounding.

I've found in a lot of cases if you read the terms and penalties, you can do better with cashing out a long term CD early than getting a shorter term CD with a lower rate.

[swaymonae]

I'm sure there's still an online savings account somewhere with a similiar rate, where money will be accesible when CD rates do go up again..

My mom locked in 4% right before it started going down..

MMA's sometimes have higher rates, too.. maybe look into one of those?

[amarowsky]

Individual - I Savings Bonds Rates & Terms

Check out those I bonds. They are a pretty solid bet right now if you are looking at a CD or Bond. Plus right now they are offering a .7% fixed rate, hard to beat that! Right now the composite of the yearly return on one is 5.64% -5 years for full maturity -1 year for withdraw maturity, and if you wanna sell out before the full maturity it is only a 3 month worth of interest penalty. Sounds like a pretty good bet right now IMO, at least for some save and decent returns.

[Smart Money]

Hi,

Smart Money magazine would like to talk to people who have moved their money into another bank in order to receive a higher interest rate in the last few months. Please call Daren Fonda on 212-830-9298 if you have a moment to chat.

Many Thanks.