Hunting For The Best CD Rates

Once a week I go yield hunting.  I’m always looking for the best rates possible for my cash because I know that if I save X amount with a Y percentage yield, I’ll eventually reach my magical yearly cash flow number which will allow me to retire early if desired.

To get to your magical retirement number quicker, you can either save more or look for better returns.  Currently 80% of my cash hoard is locked up in 5-7 year CD’s yielding on average 4%.  The “problem” I currently have is that every year I work, is another year’s worth of savings I have to figure out what to do with it.

As you can see from my nifty CD banner to the right, I don’t have to look very far at all to keep track of what the best CD rates are in the entire country.  The widget keeps track of all the rates for me and for all of you who visit this site regularly.  I clicked on a Capital One 3% CD to see what it’s all about, and discovered it’s a 10-year CD! Doh….

DURATION, YIELD, AND DEATH AS IT PERTAINS TO CDs

Up until last year, I always assumed 7 years was the longest duration offered because that’s all I saw.  Something changed this year where more and more financial institutions are offering 10 year yields.  So what happened?  Well, the markets happened and banks are being more opportunistic.

A bank’s main goal is to bring in deposits at the lowest rate possible and lend money out at a higher rate.  This is called the “net interest margin.”  As we have experienced during financial meltdowns, the stability of deposits is also important.  No bank wants a bank run where suddenly every single customer wants their money back, and then the bank goes under because they have to recall their loans.

With long term CDs, banks are able to obtain relatively more stable money.  As a yield hunter, I’m always going for the highest yield possible, generally at the longest duration possible.  Because I work and save every year, it doesn’t matter if yields suddenly go up the very next year since I have a new chunk of change to plop down.  You always want to employ the “DVD Method To CD Investing” by going after the longest duration possible to always get the maximum yield.

However, with the 10-year CD at only 3%, I’ve stopped to think whether this is a good idea or not.

Banks Are Generally Smart

By all historical standards, interest rates are low. Despite QE1, QE2 and massive monetary stimulus elsewhere, inflation is still relatively benign (so the government tells us).  However, it is very logical to conclude that inflation, and therefore interest rates must go up based on a simple IS/LM chart and truism stating that every one dollar bill created leads to one dollar bill higher in prices.

As a result, banks are taking the view that if they can lock in 3% money for 10 years, they are in a winning position.  Banks are taking the view that perhaps in years 3-5, they might have to pay 5-7% interest for similar duration CDs, thereby increase their funding costs and decreasing their net interest margins.  If a bank could offer 3% yields for 20 years, I’m sure they probably would, but nobody would probably buy them!

Death Comes To Us All

With a 10 year duration, I think about death. Will I be alive in 10 years to collect on my principal without penalty? Hope so. Will inflation be higher in 5-10 years?  Most likely yes.  Do I need the money during this time frame if I continue to work and save?  Most likely no.

What you need to do is think what the bank is thinking. With 10-year CD’s becoming more common place, it means that customers are demanding longer duration products because they don’t believe in inflation, and they are risk adverse.  On the other hand, banks are probably thinking customers are lemmings and are anxiously offering these products to take advantage of customers by locking them in during low interest rate times.

Nobody has a crystal ball, and nobody is forcing anybody to do anything. However, it’s always good in any financial transaction to think how the other side is thinking.

MATCH GOALS WITH DURATION AND YIELD

A lot of things come to mind whenever I look for the best CD rates. The good thing is that you are able to spend the interest received freely, without penalty. My personal bogey is a 4% risk free rate of return. With the 10-year yield at only 3-3.2%, locking my money up in a 3% 10-year CD is mathematically not the right move. Unfortunately, every year that I don’t lock up my money at 3%, it’s 2.7% or so in lost interest opportunity since money market funds are yielding less than 0.3%.

Managing your cash is always very tricky because liquidity is still one of the most valuable assets to have.  You might find a beautiful investment property to take down or a promising company start up you want to help bootstrap.  That takes liquidity earning minimal returns now. The good thing is that these tricky things you face are all good things. Things could be worse and you could have no cash to play with!

Recommended Actions To Increase Your Wealth

* Manage Your Finances In One Place: Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and when my CDs are expiring. If you are interested, they can even provide tailored financial advice for a small fee much cheaper than traditional wealth managers.

* Open A Yield Pledge Account: Check out the latest offerings from EverBank and take advantage of their account offerings and Yield Pledge Promise. EverBank offers competitive CD, Money Market, and Checking interest rates and is my favorite online bank with a 1.1% savings rate. You may even qualify for a bonus rate on their checking and money market accounts, which are just as good as a CD with less tie up.

Post is updated as of December, 2013.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

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Comments

  1. Everyday Tips says

    I manage my cash by spending it on unexpected expenses. (just kidding, sort of…)

    Our emergency fund is in an account that does not get the best return. We max out our 401ks and also participate in the stock purchase plan where my husband works. (It gives a 15 percent discount on the lowest price the stock hit during the prior 6 months. Quite a deal.) After we have held the company stock a year, we sell it and move it in to other investments.

    In essence, we do not have a huge ‘cash’ stockpile. Mostly the emergency fund, college savings, 401ks, and index funds. We do not currently have CDs.

    • Financial Samurai says

      I’m surprised you do not have any CDs Kris. Although you did say that it has a lot to do with spending on your kids. Which goes back to my request on wanting to learn more about how much kids really cost, and how you go about budgeting and figuring out expenditure. How about the feelings of guilt and such by not spending the very best on them etc?

      I’d build that cash hoard, or rename your EF.

      • Everyday Tips says

        I have written some about how much kids cost. However, my spending is not typical of what other people spend on their kids. I have no guilt because I do spend the very best on them. I am not referring to ‘things’, but private school, sports camps books, etc. It is something I don’t write much about also because many people think we are insane to spend as much as we do on tuition when we live in a very good school district. However, we found a school with small class sizes that works great for our kids. At this point, I have 3 very happy teenagers, and that is more important to me than money. I know that the teen happiness may not go on forever, but my oldest is 17 and he has been an absolute joy to raise, even through the teen years. (My other two are wonderful too, but they are a little younger and have more time to raise hell.)

        Another reason we don’t have a cash hoard is because we did a major home renovation and paid in cash, and we have paid for new(er) cars in cash. We are now in the process of rebuilding our cash reserves. I am also somewhat of a risk taker because I have been spending monthly on dividend stocks instead of saving more in cash.

  2. JT says

    Spreads between 10-year T notes and TIPS are right around 2.25%. So, using that as our implied inflation rate, the 10-year CDs would create a real rate of return of .75% per year. Obviously there’s some skewing here due to a temporary uptick dollar demand following volatile markets, but still–yuck.

    Brokered CDs have always been available with durations 10-20 years. Many of these are callable, which would ordinarily keep investors from buying them. Something tells me that most of these won’t be called…how much lower can you go?

    My short-term cash is stocked away in promotional checking accounts. The rates are great, but you have to deal with certain minimum requirements–usually 6-12 debit card swipes a month. I’d do that anyway, so it’s not a big deal. Plus, the 4% APY is outstanding. Percentage of total cash to assets is low, though, so I can deal with playing promos. I can see where the maximums ($25k-50k) would prevent other people from making use of them, though.

    I’m amazed at how much thicker yields are if you accept an annual payout/at maturity. I was CD shopping with my grandpa, and the best 5Yr we could find was 2.6% at maturity, or 1.9% monthly. Rates have really taken seniors to the cleaners over the past decade. 2004-2007 may have been good, but 5 year CDs purchased at that time are now maturing into a 2% rate.

    • Financial Samurai says

      Yeah, it checking accounts with those huge rates could accept $100,000+, I would do it. Even $50,000, I would do it. But, all I see are $10-20k limits for that rate, so why bother?

      2% yield for a 5 yr is low, but it signifies low inflation, so it’s a wash.

      • JT says

        It’s a wash if your cost of living indexes perfectly with CPIU.

        Seniors, who have a spending profile different of that of CPIU, get burned. Inflation, for them, is significantly higher than inflation for others.

  3. JT says

    Just noticed that you said it was COF that was offering 3% on a 10-year. I’ve been all up and down their financials lately–they’re on my “maybe buy” radar–and they’re getting an excellent net interest margin of 7.24% right now. Glad to see that they’re bidding up 10-year CDs, since they’ve got a lot of short-term financing that’s slated to mature in the 1-2 years. Hmmm…making me think today.

  4. cashflowmantra says

    I don’t have a ton of disposable cash right now since my kids are in their peak spending years. I will be focusing on putting together an emergency fund to get more liquid and then looking at some debt elimination. Since you save quite a chunk of your income, have you looked at investing more in dividend stocks? It doesn’t sound like you will even need the cash in 10 years, so I am wondering what your thought process is.

    • Financial Samurai says

      I actually do think I’ll need the cash in 10 years, bc I plan to be retired by then and living off the interest incoming and other small endeavors.

      Investing in dividend stocks, with the 10 yr only at 3% now, and the market pulling back 6% so far is a good move. I’m definitely going to deploy more funds back into the market. Caterpillar raised their dividend as well as others. Seems like a good asset allocation trade to me.

  5. retirebyforty says

    I don’t have any money in CD, but I will move some there once the rate improve. There is no point in freezing your liquidity for 10 years for a paltry 3%. IMHO. I think once we see 5% at 5 years, I would be a lot more interested. ;)

  6. Daniel Rosenhaus says

    I agree with your point that 10 years seems a little too long to put your money in one place. I feel like with inflation being so low right now, any investment decisions that are based off of those figures are going to be tough pills to swallow if you’re making a 5+ year decision. If there is one thing you can depend on, it’s corporate greed, which means prices will rise soon enough. How soon, I can’t say, but I bet it is within 5 years for sure.

  7. Darwin's Money says

    When accounting for “true inflation” and not the government’s bullshit statistic, CDs are losing horribly to inflation each year regardless of during. The government wanted to push capital into the risk trade and it worked. They inflated equities like there’s not tomorrow and they’re trying to keep it going. Without doing so, we would have seen more banks collapse, public sector and private pensions would be even worse off than they are now (find one that’s fully funded even after 100% returns from 2009′s pivot bottom). So, you’ve gotta go with the flow – equities. If you’re concerned about volatility, snag some high yielders with low volatility. But locking up my funds for years while inflation degrades my purchasing power? No thanks, not at 35…

  8. traineeinvestor says

    Locking up for 10 years at 3% nominal is not attractive. Lose 30% to withholding taxes (I am non-US resident) and the nominal yield shrinks to 2.1%. This is less than inflation (current CPI is 4.4% where I live).

    At these levels and with that time horizon, I would rather take equity risk.

    • Financial Samurai says

      Sounds good. I’m deploying my “equities cash” back into the markets after this pullback as well. I went down to 30% equities at end of April and want to get it back up to 70% this summer.

  9. Greg McFarlane says

    Do you ladder your CDs? I have one-third of my 3-year CDs coming due every year, which works for me better than just reupping annually.

    • Financial Samurai says

      There’s no need to ladder your CDs. Always go for the MAX duration for the best yield if you plan to work and have enough liquid cash.

      Say you start putting in 100k in a 7 year CD every year for the next 7 years, in 7 years you will ALWAYS have a fresh 125k rolling off evey year for 7 years straight if you don’t reinvest.

  10. First Gen American says

    Very good point. My mom only does CD’s so when she sold her house, we only put her in for a 1 year CD and rates were high. By the time the year was up, rates tanked. I didn’t ever do the math on the interest penalty of breaking the CD early. We we uncertain about needing the money so we didn’t want to lock it up too long. Big mistake. Now I take the interest penalty risk and lock up for as long as possible. It’s actually something I learned from either a blog article or comment somewhere on Yakezie, so thanks guys.

    I just got my very first CD for myself this year at 3% for 5 years. If rates ever go to 5% I can always break it and reinvest in the higher interest one.

    I have some more money that needs to go somewhere but I’m torn between doing another CD or I bond (I do plenty of stocks each paycheck, so I don’t want to do more).

    • Financial Samurai says

      If rates go up to 5% in 2 years, just simply plop your new found liquid savings in there! So long as you work and save, you will always have new money to put away. Cheers, Sam

  11. George says

    I-Bonds for the “I need to keep this principle intact”, otherwise I go for the 7%-8% tax free yields of leveraged municipal bond funds. Yes, there’s more risk of principle with that choice, but a CD would have to yield 9.3%-10.6% to match the muni bond funds.

  12. Tim says

    My six month emergency fund has grown to a three year emergency fund, most of it is in an ING Direct account earning 1%. I had a 4% cd a couple of years ago, but it expired, and I haven’t found anything better.

    • Financial Samurai says

      Good on ya for growing that cash hoard into a beast! Now you just have to never say the two words “emergency fund” anymore and label it capital, or wealth! Change your mindset!

  13. NO stocks 4 me says

    Well damn those Cell phone, black berry, Ipad, Iphone, HBO and Showtime cable and that High speed ISP bills need to be paid first before anything else.

  14. Benno says

    Is it a good idea to pay off mortgage gradually, let’s say in the beginning of each year $40k, and get rid of it in 2 years, thus bringing more income every month? $40k pays around $40.00 in interest in Capital One Bank, but will give me reduced mortgage payment, which will be $200.00 in saving each month for the first year, $450.00 the second year. And after 2 years I’ll have an income $1500+, since it is an investment property. This is an interest only mortgage, so the sooner I get rid of it, the sooner I’ll have this great income. Would it be the right decision instead of keeping $40k in the bank or I should be keeping it in cash and keep $40k each year ?

  15. NO stocks 4 me says

    I give a rats less about the maaaket, I’m glad to see the smugs get hit like we low level savers have been since gen.bernakapart crapped on the interest rates.

    As usual though it went down by 600 and now back up to 500 down and the CNBC clowns are already sayin “its off its lows” ita a “ralley”, smirks, Cramer will be out soon with the noise makers and party hats.

    Those that had the bucks to buy gold last year are doing well, I didn’t have the bucks to buy it than and damn sure don’t now, but so it goes.

  16. NO stocks 4 me says

    well the only option I had today was to go with BB&T, they had a 30 month CD at 1.2% (rate and yield) I took that deal only because it has this deal where you can close it in 12 months without any penalty, so its kinda like a 1 year 1.2% CD, also if rates are still in suck mode, you can leave it alone, and when you decide to close it its your call, only thing is when and if I close it I need to pull all fnds out, as anything left after the initial withdrawal would than be under the 6mo withdrawal penalty. but hy its one way to go.

    I’ll end up going through this drill again in Oct as a damned good 6%’er comes due, already have my cryin towel, smirks. I’m so fkn tired of this idiot Bernak, that I can’t even bother to listen or follow him anymore.

  17. SB @One Cent At A Time says

    I am looking at Series – I, inflation adjusted bonds. For CD right now for a two year (I can’t go for more years now) is less than the inflation. For any new investment this might be a vehicle of choice when you are saving for shorter term goals.

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