One of the realities we’ve been facing for several years now is the fact that interest yields on many savings products are quite low. Interest rates were cut in the name of economic stimulus, with the idea being that lower interest rates would encourage more people to borrow money.
While the Federal Reserve is starting to raise rates (as of December 2015), we are still in a low-rate environment. We aren’t sure how quickly the Fed is planning to make subsequent rate hikes, but it will take some time before rates come close to reaching the level seen prior to the runup to the financial crisis of 2008.
For savers, all of this has meant quite a bit of frustration, since it’s practically impossible to find good yield on savings accounts and on CDs. Some savers are trying to do what they can to boost their returns by chasing yield with their CDs. Unfortunately, that might not be the best way to make things work for your portfolio.
The Problems with Chasing Yield on Your CDs
There are ways to find better yields on CDs, usually by looking at local and regional financial institutions. Credit unions might offer better rates, and sometimes you can find promotional rates that are much better than “regular” rates.
It’s also possible to find CDs with special introductory rates, and you can find higher-yielding CDs on the secondary market sometimes. You might also be able to find higher rates on more “creative” CD products, such as callable CDs and step-up CDs that provide the potential for higher rates over time. These products, unfortunately, come with different requirements. Additionally, you might find your CD revoked in the case of callable CDs once rates start climbing at a more rapid rate. The issuers won’t want to pay the higher rates if possible.
The reality is that even the best CD rates are often too low to allow you to adequately overcome inflation and provide you with solid returns. No matter how high a return you receive, you aren’t likely to beat inflation. In fact, many CDs barely manage to provide you capital preservation. If inflation increases in coming years, you will still find yourself losing out in real terms, no matter what kind of yield you find on a creative CD.
Spending hours and hours of your time looking for the best CD yields could easily prove fruitless, since you aren’t likely to find something that is more than a 0.50% better than the next. That’s time that might have been spent more profitably. You could make more money, or find a way to save money, with those hours. That will put you in a better financial situation than any small yield advantage you might see from chasing yields.
Another problem with chasing yield is that the highest CD yields are often on longer-term CDs. So, you have to lock in for five, seven, or even 10 years if you want the best possible CD rate. Once you lock that in, though, there are penalties if you try to cash in early to take advantage of rising rates. There are some analysts that expect rates to start rising again, since the economy is showing signs of recovery right now.
Getting the highest rate now comes with a price. You might not be able to take advantage of better rates in a year or two, since you will be locked in for several years. Spending the time and effort to make it work, and then finding yourself trapped with the rate you end up with, might not be worth the trouble. You might do better investing your time and energy elsewhere.
You can reduce some of the trouble associated with locking in long-term CD rates by following a laddering strategy. That way, you can take advantage of the highest rates available now, but you also have a little flexibility, in that you have the chance to choose a higher rate as your short-term CDs mature and you roll them over.
Your laddering strategy isn’t the same as chasing yield, however. It is a strategy designed to provide you with some flexibility with CDs. If you can set up an effective CD ladder, that can help you use yield to your advantage, as well retain some flexibility. Even with this strategy, though, you are unlikely to build wealth over time at a reasonable rate, and there is a good chance that you will not beat inflation.
There is a good chance that it’s not worth it to chase CD yields. The risks associated with inflation, and the possibility that you could miss out on interest rate increases, just isn’t worth it for the relatively small difference it will make. Carefully consider the reasons that you are thinking of investing in CDs, and then consider whether or not some other financial product might help you better reach your long-term and short-term money goals.
In fact, you are probably better off using the time you research CD rates while chasing yields to invest in something else. Learn about indexing, or research dividend paying stocks. These types of investments are worth the amount of time you put in, and you have a better chance of beating inflation and building wealth over time.