Question for CD Investors

[scfr]

Is anyone investing in CDs right now? If so, what length and terms?
I'm trying to choose between 2:

1) 5-year at 2.30% with 180-day (half-year) early withdrawal penalty

2) 61-month (5 year + 1 month) at 2.53% with 540-day (1-1/2 years) early withdrawal penalty

Both institutions are FDIC insured and have comparable soundness ratings.

The early withdrawal penalty is a factor, not because we would need the money before the CD matures, but because we might choose to eat the penalty and reinvest if interest rates rise enough.

I'm leaning towards option 2 and DH is leaning towards option 1. I'm more of a "bird-in-the-hand" type who in 25+ years of investing in CDs has never regretted locking in a higher rate (and have never cashed out a CD early). But things do feel different now than they have in the past so I'm willing to consider option 2. DH is more optimistic about interest rates rising and likes the flexibility that comes with the lower early withdrawal penalty. He doesn't like the thought of being more locked in and missing out if interest rates rise. (And I don't like the thought of missing out on more interest with the higher locked rate.)

Anyone's crystal ball polished up enough that they care to make a recommendation? Maybe we should split the funds and go for both?

[Jluke]

How much are planning to put into the CD?

I have 30k at 0.75% (emergency fund) and get $19 in interest per month.

Is there a minimum for the CD and can you own more than 1 of the same type?

If so, would a CD ladder work in your case?

Disclosure: I do not have any money in CDs at this point.

[creditcardfree]

Yes, we have CDs at Navy Federal. Just moved money into one paying 3% for 5 months.

I sure don't like that penalty for #2.

I say split the difference, half the money in each one.

[disneysteve]

I think it depends. What does the rest of your fixed income portfolio look like? Do you have other CDs and/or bonds?

I think the best plan for your fixed income portfolio is to have laddered maturities so that every 6-12 months, you have something maturing. That way, you regularly have money available to reinvest as rates climb.

Right now, I don't think I'd be locking up money for 5 years because rates are on their way up. If I did do a 5-year CD, I certainly wouldn't want an 18-month early withdrawal penalty. That's a long time to be kicking yourself as you calculate how much you're losing by having that money tied up.

But again, it depends on the rest of your portfolio. If this is just one rung on your ladder, the higher rate might be a perfectly good choice.

[Drake3287]

I agree about not locking anything in for 5 years unless it's a real high rate which of course none of them are.

I have 3 $100,000 CD's along with all my other various investments (plus pension) and each is locked in anywhere from 11 to 18 months at around 1.55%. I know many people laugh at having CD's but for me it's my secure fall back in case anything serious happens to my stock investments.

I have two of them with local banks in my area and a third one with Capital One Savings which is an online bank. At this point I'm quite comfortable in using virtual online banks.

[disneysteve]

1) 5-year at 2.30%

I just happened to see an ad in today's paper for a local bank paying 2.10% for a 36-month CD. I think you should search around. You may find you can do nearly as well with 36 months as you listed for 60 months. Even at 2.1%, I wouldn't tie up the money for an extra 2 years just for the 0.2% additional you would earn.

[Fishindude77]

Just checked my local banks website; 12 month CD was 0.4%, couldn't get over 1% till 48 months, and best was 1.7% for 60 months. Too bad, CD's used to be a nice place for average folks to stash a few dollars and get a little safe return. Now you've just about have to put your money at risk in the stock market to get any sort of return.

[disneysteve]

CD's used to be a nice place for average folks to stash a few dollars and get a little safe return. Now you've just about have to put your money at risk in the stock market to get any sort of return.

I think CDs are still okay. You just need to seek out the best rates. As I posted above, one nearby bank is paying 2.1% for 3 years which isn't so bad.

[Nutria]

I have 30k at 0.75% (emergency fund) and get $19 in interest per month.

I don't know the term on your CD, but Ally Bank has double that on 11 month CDs with a $25K minimum deposit.

[Jluke]

I don't know the term on your CD, but Ally Bank has double that on 11 month CDs with a $25K minimum deposit.

Not a CD; just a CapOne360 savings account.

seeing the words CD and Investor in the same sentence seems odd during these low interest rate times.

[Nutria]

Not a CD; just a CapOne360 savings account.

Ally's savings account rate is 1.15%. The only thing they don't have are "Kids Savings" accounts.

seeing the words CD and Investor in the same sentence seems odd during these low interest rate times.

My first thought was, "that's saving, not investing!"

[Drake3287]

What many people don't realize is that many banks (mostly smaller, local one's) offer unadvertised "special" CD rates which are higher then the listed ones.

I recently opened one at Luther Burbank Savings here in California and it was .25 higher then the advertised one. Always worth asking.

[disneysteve]

What many people don't realize is that many banks (mostly smaller, local one's) offer unadvertised "special" CD rates which are higher then the listed ones.

Also, banks will sometimes have special rate offers for atypical durations. Rather than 12 months or 24 months, they might run a special for 16 months that's higher than either of the other two.

[scfr]

Not that anyone cares but me, but ...
We ended up splitting the funds 4 ways.
At one institution, we got 3-, 4-, and 5-year CDs that we plan to hold to maturity. These are part of what I suppose you could call our "would-never-be-approved-by-OSHA CD ladder." (I believe in CD ladders in theory, but because we're always looking around for what we think is the best term & rate at any given time, our ladder has some missing rungs and some rungs that are very close together.)

At another institution, we got a 5-year CD that we are using as "money market savings alternative." The rate is a bit lower than what we got on the 5-yr CD mentioned above, but so is the early withdrawal penalty (EWP). As long as we end up holding this CD for at least 14 months we'll still come out ahead of what the current top rates are for MMAs. I've been aware of folks treating CDs more like MMAs, taking in to account the EWPs (it is discussed quite a bit on the Deposit Accounts web site) but this is the first time we've done it ourselves.

[creditcardfree]

I think with interest rates being as low as they are this is the way we have to earn any interest at all, looking at CDs and factoring in the penalty. Not the preferred way.

I like that you took advantage of all options. Not just one or the other.