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Consider Buying Long-Term Certificates of Deposit

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Citizens BankMy friend once asked me why anyone would put their money in a 60-month certificate of deposit. In our age of instant gratification and blockbuster returns, the thought of putting a sum of money, even if it’s just $100, locked away for 5 years with a pittance of a return seems preposterous. Why put it in a 5 year CD when a high yield savings account can give similar returns? Thirty year Treasury bonds? Forget about it, they’re not even on the radar.

The Fed Will Lower Rates

However, recent market events have really knocked those ideas on their head as people are looking for a safe place to put their money. The economy is looking shaky and many are anticipating that the Federal Reserve will lower the target federal funds rate. Investors typically use options on federal funds futures as a way of predicting how the Fed will move rates in their next meeting. You can review the summary of those futures on the Cleveland Federal Reserve Bank’s website. The futures are absolutely certain the rate will be lowered, it’s just a matter of how much (50 basis points to 1.00% is the most probable). As the federal funds rate drops, so will high yield savings accounts interest rates and any incentive for Americans to save.

When they lower interest rates, it’s almost certain that high yield savings account rates will move down with them (it’s just a matter of when). In an environment of declining interest rates, remember certificates of deposit. It’s a bit disheartening to think that I wrote that post as a post script to what I, and many, thought was the start of a period of increasing interest rates. The economy wasn’t stellar, there was still talk of a recession, but the Fed was more fearful of inflation than recession. Now, its the fear of an economic slowdown that has the Fed acting.

Mitigate Risk

Another good reason to go with a CD is that it helps mitigate risks. If you put some of your savings into a CD, you won’t be tempted to withdraw it and chase after an investment. You earn a little return for your funds but you also lower your investment risk. It’s a bit of a stretch to say it but it’s a point that shouldn’t be overlooked. With the tumultuous market and low prices, you might be tempted to put a lot of money into an investment that you otherwise wouldn’t have. By having some of your funds already locked into a CD, you preclude that from happening.

Early Redemption

Locking in a so-so rate of return into a CD doesn’t look so bad right now. And to those who are concerned about having their money “stuck” in a CD, you are usually allowed to withdraw your funds after a penalty. For example, ING Direct will deduct 3 months of interest on CD’s with maturity periods of 12 months or less and 6 months of interest on CD’s with maturity periods of greater than 12 months (the penalty could be more than the interest earned to date).

I keep a list of the best CD rates available for CDs of 12-18 months or less, with links to the CD rates pages so you can see how the longer term rates are.

While I’m not saying long term CDs are the best option, I don’t know what is (feel free to chime in with your vote), but in our current economic environment, long term CDs may be cool once again.

(Photo: baronbrian)

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10 Responses to “Consider Buying Long-Term Certificates of Deposit”

  1. mapgirl says:

    My folks are in some long term CD’s at 5% interest rates. That’s one good thing about their broker. He put them into some seriously safe investments now that they are old. They will be receiving that rate till this whole thing blows over in a few years. (Not to be flippant, but in 3 yrs everything could change. For the better, one hopes.)

  2. jim says:

    I don’t think that’s flippant at all, I think a lot can change in just a year…

  3. Patrick says:

    At this time, a long term CD is perfect for those who want to make sure they are going to receive a solid return on their investment. For more riskier investments, the stock market is the place to invest in. There should be a rebound within the next year and tons of money could be made.

  4. Miss M says:

    Well it’s not a long term CD but I did just buy my first CD today, the 1 year 4.25% from ING. Rates are definitely going down for the short term, not sure about long term. Also I may need that money in the next 2-3 years.

  5. ajc says:

    Then why is Warren Buffett – for the first time ever – moving his PERSONAL MONEY (i.e the money he has squirreled away over the years, other than the $40+ Billion that he has tied up in Berkshire Hathaway) …

    … OUT of bonds and INTO the stock market?

  6. jim says:

    Just because Warren Buffett does something doesn’t make it the right decision for everyone. If you have money to put into the market, that’s great, invest it. If you don’t, long term CDs are a safe option.

  7. savings says:

    Most CDs paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complicated. Investors may now choose among variable rate CDs, long-term CDs, and CDs with special redemption features in the event the owner dies but with enough money to invest go for the long term CD.

  8. Patrick says:

    My wife and I have a 5 year CD ladder which we started just over a year ago. It’s not a ton of money compared to our retirement savings, but it is enough to make a difference. I think the CD ladder provides some smoothing on the overall returns in our portfolio (the same way bonds would I guess).

  9. John says:

    Let me ask you this: Why not buy a 7 year cd at a credit union (Say like a Navy Fed), at 4%. a long CD like that typically has a 6 month interest penalty to get out early. So if I break the CD after 1 year, i lose half my interest. But so what, I just made 2% on a 1 year CD. Today, where can you find that deal?

    If I hold it for 2 years, I have a 3% 2 year CD and so on. Why ever buy a short term CD?

    Is there anything wrong with my thought process?


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