These are the 5 best strategies for investing in CDs right now, experts say

The Federal Reserve has kept rates high over the past year to continue the fight against inflation. On the other hand, it is more expensive to borrow money in today’s high-rate environment, as rates on mortgages, personal loans and other borrowing options are much higher than they were a few years ago.

However, on a positive note, the rate environment has been a boon for savers and certificate of deposit account (CD) holders in particular. A big advantage of CDs is that they allow you to lock in your interest rate for a certain term. For example, while average 5-year CD rate is 1.40% (as of July 15, 2024), some of the best CDs come with rates greater than 5% now.

But while putting money into a CD can pay off big, you need to make sure you have the best strategy maximize your returns.

Find out how top CD accounts can help you reach your savings goals now.

These are the 5 best strategies for investing in CDs right now, experts say

These strategies can come in handy when opening a CD to get the best return on your investment, experts say.

Shop for the best CD prices

To maximize your profits, experts say the first step is to shop for CDs and compare rates from several financial institutions. For example, Steven Calio, CFP and CEO of financial planning firm CSG Financial, recommends comparing CD rates from banks and credit unions to find the best rates.

“Online banks often offer competitive rates,” says Calio.

Explore some of the best CD rates available to you here.

Choose the terms of a CD based on your need for liquidity

In addition to comparing rates, make sure that choose a CD term that fits your overall financial plan. Ultimately, the best strategy for investing in a CD varies based on your financial goals and liquidity needs, according to Calio.

For example, if you’re saving for a dream vacation that’s a year away, you might consider opening one 1 year CD.

Create a CD scale

Another strategy that experts recommend is building a CD scale. With this strategy, you buy CDs with shorter and longer maturities, spreading your money across the CD tiers so that your CD accounts mature at a staggered rate, giving you access to regularly on a portion of your funds.

One benefit of doing this is that it allows you to lock in multiple CD fees, but it also provides liquidity and flexibility for how the money is used in short-term CDs after they mature, says Jason Dall’Acqua, financial planner at certified in Crest. Wealth advisors.

Another benefit is that it can help you avoid potential early withdrawal penalties.

“Scaling, or investing equal amounts of money in a series of longer maturities, such as a 1-, 2-, and 3-year CD, can give you the flexibility to deal with a liquidity problem that may arise without liquidating a CD with a penalty,” says Gregory Harmon, assistant professor of banking and finance at Case Western Reserve University.

That said, there are some potential drawbacks to consider. Calio says your initial returns with this strategy could be lower than investing all of your funds in a long-term, high-yield CD. Plus, managing multiple CDs and reinvesting the proceeds takes more time and attention.

Buy long-term CDs to lock in fees

While short-term CDs tend to have higher rates than long-term CDs in today’s economic environment, it may still make more sense to lock in a long-term rate now.

Long term CDs it can offer more stability and better returns over time, says Calio. When choosing a CD term length, it can help to weigh the trade-off between immediate returns and long-term gains.

Ryan Cravitz, Certified Retirement Income Professional with Cravitz Financial & Insurance Solutions, also notes that locking in a long-term CD charge today can be a smart move. That’s because even if the Fed cuts rates soon, your top rate CD will be locked in for the rest of your term.

“In 2000, for example, you could find CD rates above 5%,” says Cravitz. “Then, just a few years later, CD rates dropped significantly. Some CDs only paid about 1%.

Reinvest proceeds from maturing CDs into new ones

Reinvesting your CD earnings can help you take advantage of compound interest. Calio recommends reinvesting the proceeds from maturing CDs into new ones to take advantage [potential] increase in interest rates.

After all

The right choice depends on your unique financial circumstances and goals, says Calio. However, by understanding different strategies and evaluating your personal needs, you can optimize your CD investments in today’s rate environment. And, it’s important to diversify your assets, experts say. While today higher CD rates attractive as they may be, they don’t compare to the average annual returns of the S&P 500 in the past, for example, which have exceeded 15% per year, Dall’Acua says.