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The Risky Business of CD Rates

Last November, J opened a CD at Ally Bank. The idea came from a big conversation we had about making his money work harder.

He invested $500 in a 2-year Raise Your Rate CD at 1.5% at Ally. This type of CD allowed him to increase the rate once during the term. (For reference, his online savings account was earning 1.25%.)

What happened

Fast foward to this spring and I saw the rates going up. And up. And up.

It’s hard to know when to take action and when to hold, so for awhile, we held steady.

We also watched regular savings account rates rise and for a bit, the savings account rate was higher than the CD rate. (It’s currently 1.75%.)

In June, we finally bit the bullet and increased the CD rate to 2.35%. The CD matures next November 2019.

And now the rate is currently 2.5%.

What we learned

CDs can definitely have a place in a well-balanced portfolio and have some benefits:

  • The money is locked away so we can’t get to it and spend it
  • BUT, we’ll have access to the money in a short time (about a year)
  • We’re earning more with the CD than with a regular savings account
  • And we’re diversified! J doesn’t have all his eggs in one basket which is good (unless you’re Easter egg hunting where you DO want all the eggs in your basket <– J’s contribution to this article when I had to explain the word diversified)

I think it depends on what you’re saving for, when you need the money and your risk tolerance. Because he didn’t need the money right away, but wanted to experiment, investing a small portion of his money in a CD gave us invaluable experience.

So overall, I’d say we’re happy (even though the current rate is higher than the rate we have now).

Just a bit about CD ladders

If you’re going to invest in CDs, the ladder is definitely the way to go. It involves shorter terms, smaller amounts of money and staggering investments so that CDs mature at different times.

The benefits are that your interest rate risk is limited (you have regular opportunities to invest) and your liquidity risk is limited (you have access to your money more consistently).

Read more about CD ladders at the Motley Fool.

What about you? Do you invest in CDs? Why or why not?

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