Anyone who’s been banking for the last few decades can remember the days when CD rates were so high that their interest alone could fund a lush retirement. The peak came in August 1981, when the interest rate for one six-month CD in particular hit 17.98 percent, according to MoneyRates.com.
To put that in perspective, if someone had deposited $10,000 into a CD that month, and that person could keep rolling over the deposit into a new CD for 40 years, their account would be worth over $13 million at retirement (assuming interest rates compounded daily).
We don’t have to tell you that times have changed. These days, the United States Federal Reserve has been keeping the federal funds rate – its short-term interest rate – below 1 percent (closer to zero, really). And since banks rely on the prime rate (along with other market and business conditions) to set their own interest rates, the returns on their savings accounts have been pretty low as well, Bankrate explains.
Despite the low prime rate, CDs are still a good place to park your money. For one thing, unlike stocks and many other investments, bank CDs are safe – FDIC insured up to the maximum allowed by law. Plus they’re much more flexible than they used to be.
For instance, before, all CDs required you to leave your money in until maturity or face a penalty for early withdrawal. Now savers have options such as Ally Bank’s No Penalty CD, which allows you to close your account six days after funding with no penalty.
Plus, Ally Bank continues to offer highly competitive rates on its CDs, paying a 0.89 percent annual percentage yield (as of March 27, 2013) for its 12-month High Yield CD. (Use Ally Bank’s CD Widget below to compare rates.)
If CDs are starting to sound appealing to you, here are three suggestions you can use to make them work even harder.
Using CD Ladders for Dollar-Cost Averaging
CD laddering is a type of dollar-cost averaging. CD laddering lets you open a short-term CD that gives you faster access to your money at lower interest rates and also lets you open a long-term CD that pays a higher interest rate, which holds onto your money for years.
With CD laddering, you can spread your money out among several different CDs with varying interest rates and terms. Use this strategy and you’ll have access to some money when your short-term CDs expire, while getting a higher payout from your long term CDs. Meanwhile, you’ll constantly be renewing CDs, always giving yourself the option to take advantage of the highest paying CD interest rates available. You can get started by using Ally Bank’s ladder tool.
Taking Advantage of Rising Interest Rates
At one time, one of the few drawbacks of a CD was that you were locked into whatever interest rate was available when you opened the account. But now, with products such as Ally Bank’s Raise Your Rate CD, you can take advantage of rising CD interest rates, while also getting the advantages of a traditional CD.
For instance, with the Ally Raise Your Rate CD, you can enjoy a great rate now, plus have the option of increasing your rate once with our 2 year CD or twice with our 4 year CD, if the rate goes up for your CD’s term.
Buying CDs in Parallel
Like CD laddering, buying CDs in parallel lets you spread out a cash deposit over several CDs, but the difference is that all of the CDs will have the same maturity date.
For anyone who worries about tying up money in a CD – and having to pay a penalty for an early withdrawal – buying CDs in parallel gives you a way to access your account in an emergency with minimal drawbacks. Instead of putting $10,000 into one CD, allot the cash among, say, five of them. If you find you need access to $2,000 of your money before the CDs mature, you’ll only have to pay an early withdrawal penalty on the $2,000 rather than on the whole $10,000.
How long have you been putting your money in CDs? What kind of CD investing strategies have you used?
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Comments
Jeff B. on January 4, 2016 at 4:13pm
Exploring CD rates and buying online?w
Nick on February 15, 2017 at 12:44am
You really can not make enough money buying cd it's a joke less than 1 percent and than to pay taxes on that little return it's not worth it , these institution lend your money at 5 and 7 percent and throw you a bone. Here what to do, pay all your loans, and have someone help you invest your money gradually in the market buy dividend stock mutual fund , but remember there is risk involved , so don't just jump in . Play it safe diversify.
Anna on May 4, 2017 at 10:10am
Thank you for the informative article. I am now SOLD on putting money into CDs, and I will be contacting Ally over the weekend to start the process. THANKS!
Ally on May 5, 2017 at 9:09am
Hi Anna, we're so happy to hear this! If you're interested in opening a CD, please give us a call anytime 24/7 at 1-877-247-ALLY (2559) or chat with us online!
Mike H. on September 27, 2017 at 7:55pm
The other big CD advantage is that the money is usually compounded daily. Whereas in the stock market, your money balance is constantly going up and down so you don't get that continuous compounding of return on return over year after year.
Andy on December 20, 2017 at 10:23am
CDs or Certificates of Depreciation cannot keep up with inflation. Yes, it's true that they're safe in the sense that you can't lose money, but you don't make any money either. And in that way, you're losing buying power. The only CD from Ally that I would consider is the No-penalty CD and only if it were significantly higher than their savings account rates. The only money you want invested in vehicles that make less than inflation is your emergency fund. What good is an emergency fund if you can't access the money in an emergency. I understand the the ladder method allows you to access some money at any given time, but using that logic, I would need to have an emergency fund 12x bigger than I would ever need so that each month I have enough to pull out. I would rather have a normal sized emergency fund and invest the other 11x in something that will beat inflation.