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Interest rates on certificate of deposit accounts (CDs) have been very attractive to savers in recent years, but inflation has slowed in recent months and, in turn, the Federal Reserve has adjusted policy in response toward the end of 2024 . As a result, CD account rates began to decline. Fortunately, they haven’t reached their lowest point – and savers can still make money. a good amount of interest on today’s CDs if they are intelligent.
“Rates are better than they were five years ago, but not as good as they were a year ago,” says Patti Brennan, president and CEO of Key Financial. “Most maturities peaked in October 2023 and have rebounded reactively since then. Yet as a major emergency fund, generally speaking, they appear to benefit from a very rare period to keep pace with inflation after taxes.”
Using CDs wisely simply requires finding the right account, choosing the right term and, perhaps more importantly, knowing how much to deposit.
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How much should you invest in a long-term CD in January?
Are you considering a long-term CD in January? Here’s what the experts say to do.
Know your needs and timeline
To determine how much you can safely stash in a CD for the long term, “the purpose of the money is key,” says Brennan.
Do you need it for your wedding in five years, and if so, how much? Is your child going to college in three years and need a certain amount? Knowing what you will use your potential CD proceeds for can help you determine how much to deposit.
You will also need to know how much money you can leave untouched for a long period of time.
“Think of the money you deposit as inaccessible,” says Krisstin Petersmarck, president and founder of New Horizon Retirement Solutions. “If you surrender a CD before the maturity date, you will face an early withdrawal penalty. So, depending on the terms you agreed to when you chose the CD, you will lose some or all of the interest you have won – and the longer the duration of the CD, the higher the penalty can be.
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Don’t invest too much and have an emergency fund
Pay attention to drop too much in a CD account, experts say. For one thing, getting too big could put you outside the Federal Deposit Insurance Corp.’s protections.
“If you invest more than the FDIC coverage and the issuing bank has financial problems, you could lose your capital,” says Harmon Kong, co-founder of Apriem Advisors. “
The FDIC currently covers $250,000 per depositor. This means that if a bank fails, your deposits are protected – and will be returned to you – on balances up to $250,000. If you exceed this amount, this additional money does not benefit from this guarantee.
Another problem with investing too much? You can exhaust your emergency fund.
CDs aren’t like traditional savings accounts, which you can draw on when you need access to your funds. When you deposit money into a long-term CD, you won’t have access to the money for years — not without paying an early withdrawal penaltyanyway. For this reason, you’ll need to make sure you have a solid emergency fund to weather any financial storm.
“Make sure you have other funds available for these unexpected or emergency costs,” says Petersmarck.
Enjoy a CD ladder
Most experts recommend mixing Long and Short Term CDs in what is called a CD scale. This involves spreading your deposit across multiple CDs of different lengths, allowing you to take advantage of high interest rates on CDswhile also ensuring you have regular access to your cash flow (each time an account matures.)
“A CD ladder is a strategy of staggering your maturity dates over a time range so that certain CDs mature at different times,” Kong explains. “The idea behind this strategy is to quickly provide you with cash when needed. If rates fall, then some of your money is locked in at better rates than are currently available. If rates rise, your previous CD will become due. , allowing you to invest at higher rates The laddered CD will give you the most flexibility for your CD funds.
This strategy can also help you achieve different financial goals, says Brennan.
“Choose a six-month CD to fund the tuition payment in August, the car in 18 months, or three separate CDs with different maturities the first three years of retirement,” says Brennan.
The essentials
Determining how much to deposit into a long-term CD is a process that requires you to weigh several different factors, including your goals and the timeline for accessing your funds. If you’re unsure how to best implement your CD strategy – or how much to deposit into your accounts – it may benefit you to speak to a financial advisor. They can help you determine the right decisions based on your goals and budget.
