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elbanditoroso's avatar

What's your view on CDs and interest rates given that (supposedly) inflation is about to pick up?

Asked by elbanditoroso (30570points) May 31st, 2021

I have a 2-year CD that matures in about a month. I bought it in 2019 before the COVID-19 stuff happened, and it has an interest rate of 1.50% or so.

The local banks are offering insultingly low rates – .03 or .05%. Credit unions are offering .65% for 1-year and .80% for 2-year CDs. The bank-by-mail (that is, internet banks) are similar to but a little lower than the credit unions are offering.

Here’s my question:

Since (theoretically), inflation is going to pick up later this year, would it make more sense to buy a 1-year renewal and then hope that rates are up in June 2022? Or would you get the 2-year renewal now, knowing that by 2023 rates might be considerably higher?

aside: the difference in income between .60% and .80% amounts to about $2.00 per month for this investment, so either approach isn’t going to make me rich.

What’s your take on interest rates for the next couple years?

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14 Answers

JLeslie's avatar

I’d go with the one year. I have a .9% interest rate with a CD that has about 6 months left, and I can actually add money to it at any time, but I can not withdraw it once it is in there. I was thinking about adding $100,000 to it, just to put the money somewhere and not have it locked up too long. It is in a savings account right now.

If you are very conflicted just put half the money in one and half the money in the other.

I think in the next 6 months interest rates will start to rise. Complete guess, I obviously do not have a crystal ball.

kritiper's avatar

Inflation WILL be a factor in the coming years, if not right away. Why? Because minimum wages are going up, at some point to hit $15 per hour, and that will drive everything up.

zenvelo's avatar

Realistically, given consensus here of inflation in 6 months, buy a 6 month CD.

You would do better buying shares in a dividend ETF and getting income each month.

chyna's avatar

@JLeslie Why not a money market which is about the same interest rate but you wouldn’t have to wait to get your money if needed?

JLeslie's avatar

@chyna Yes, if the money markets are the same rates I think that is a great idea right now. A few years ago I did that with some money and lost out, because the CD over time would have been better, but right now the rates are so low and should go up that it makes sense. Good suggestion. I don’t know what the money market funds are giving now, I haven’t looked.

What I find is the money I keep in savings/money market I tend to INTEND to do something with it, and then I fail to, and so making decisions like just putting it in a decent CD is better, but that has to do with my inaction when I should be acting.

elbanditoroso's avatar

@JLeslie that’s always the trick. I have about 60% of my worth in CDs of one sort or another, but I always keep the rest liquid (money market accounts, where I can get at it quickly if I need it) – just in case.

If I could see the future… well, lets’ say that I would make different financial decisions today.

JLeslie's avatar

@elbanditoroso I’ve lost a few hundred dollars because I mean to move some money into that CD and have not done it yet. I have to physically go to the bank, and it is not around the corner, but it is not that far. I hate losing money that way, when I already made the decision and just have not taken care of it.

janbb's avatar

Once interest rates dropped so low, I realized there was no advantage to putting money into CDs and tying it up. I have a variety of investments and liquidity in my money market account.

chyna's avatar

Just checked my bank for rates:
CD for 6months .05.
Money market up to 49,999.99
Rate is .05.
50k and above rate is .10.
For this period in time I don’t see how a CD makes sense.

JLeslie's avatar

@chyna Because the CD is much higher than the rates you just quoted.

chyna's avatar

^The OP asked about getting one now. I gave my opinion to him on getting a new CD now.

RedDeerGuy1's avatar

I just earned $0.01 in interest from my savings account. This month.

JLeslie's avatar

@chyna Ok, I wasn’t arguing, just saying why it might make sense to the OP. Up above you engaged me in a question, so I felt it might be ok to respond to your most recent question, my mistake.

crazyguy's avatar

I personally shun cash or cash equivalents. The average return on real estate over the last 40 years or so has been about 6%, while equities have done even better. When I was trying to decide whether I could afford to retire, a critical number was what return my funds would produce relative to inflation. I set up a spreadsheet and ran the numbers assuming that my average return over the balance of my and my wife’s lifetimes would be about 4% and inflation would average 3%. The way professionals do it in order to generate probabilities of outliving your assets is a Monte Carlo simulation; they use actual returns of balanced portfolios, except they randomize which year gets what growth. Obviously, if the bad years happen early in your retired life, you probably won’t make it.

To my enormous delight, I discovered soon after retiring that my estimates had been too conservative. Not only was inflation subdued, but I was able to generate returns on our funds many times higher than 4%.

My advice to you would be to not even think about rolling over the funds in a CD. Keep in mind that a CD is an illiquid investment. If you were to buy a relatively conservative mutual fund and/or an ETF, you will do far better.

In order to have funds set aside for emergencies, I recommend a credit line secured by either real estate or (better, because interest rate is lower) stock portfolio.

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