Short-term Certificates of Deposit (CD) are a great way to park your cash that earns the highest possible risk-free return. Let's take a look at historical short-term CD rates, the benefits of owning CDs, and the highest short-term CD rate today. For many years the best offering was 12-month CDs by CIT Bank. Currently, the 13-month, 18-month, and 6-month short-term CDs by CIT Bank have the highest APY.
Historical Short Term 12 Month CD Rates
Back in 2018, CD rates finally started to go up when the Fed raised rates. But they started to decline in 2019 and 2020 when the Fed cut rates and COVID19 hit.
With so much uncertainty in the markets, stocks don't have the same allure as they did during the long bull run. As a result, many investors are rebuilding cash and CD holdings in their investment portfolios.
Due to the significant drop in rates during the pandemic, CDs were not that attractive as a way to earn passive income for a while. Rates were just too low for many people to bother opening accounts.
Fortunately, the Fed rate hikes in 2022 boosted interest rates and made CDs attractive once again. Notice the fast ramp up in Q3 2022 below showing the recent rise of short-term CD rates.
The Highest Short-Term CD Rate Today
Granted, the highest short-term CD rates at most traditional banks are still fractions of a percent. However, direct banks are offering significantly higher rates. Because direct banks (aka online-only banks) can save on overhead costs, they're able to pass on higher APYs for consumers.
For example, at the time of writing (3Q 2023), CIT Bank is offering 5.0% APY on 6-month CDs, 4.65% APY on 13-month CDs and 4.6% APY on 18-month CDs. And for those who want more flexibility, CIT is also offering a No-Penalty 11-month CD at 4.9% (rates are subject to change).
Although at the time of writing you can find higher 12-month CD rates at other banks, CIT Bank's 13-month CD rate is notably higher than those 12-month rates. With only a one-month difference in expiration, CIT Bank's 13-month CD is great choice if you want a short-term CD.
Why You Should Invest In A Short-Term CD
If you're wondering whether you should invest in short-term CDs, here are the pertinent benefits.
* Accrued interest is accessible. In the event that you no longer have income and no longer have any savings, all the accrued interest earned from term CDs can be withdrawn and used penalty free.
* No-penalty CDs are now available. If you want the flexibility to access funds before maturity, no-penalty CDs are a great choice.
* CDs are 100% backed by the FDIC up to $250,000 per person on a account. You don’t have to worry about some corporate CEO scandal or competitive threats blowing up any specific stock holdings you may have. As a result, you can focus on more productive things.
* CDs offer a much higher interest yield than money markets. Some people complain about low CD interest rates. But they can be 5-10X higher than money market account interest rates if you know where to look. Typical money markets are the real travesty! I left the majority of my money in a money market for two months earning 0.3% a year which didn’t feel optimal.
However, there are some newer products like CIT Bank's Platinum Savings Account and CIT Bank's Savings Connect account that offer much better rates than money markets. And the account features are very similar.
* Diversification is important. You should always have at least 5% of your net worth in risk-free assets like money market accounts, CDs, and US treasury bonds. You want to always have a risk-free buffer in case something happens to you.
Open A High Interest Short-Term CD Account
I strongly suggest taking a look at CIT Bank's CDs. They consistently have some of the highest rates I've seen. For the past several years, you could only high rates like that if you locked your money up for five years. If you take another look at the historical 12-month CD rates above, you'll also notice just how high CIT's offers are in comparison.
In addition, consider building a CD ladder every 3-6 months in a rising interest rate environment. In six months, interest rates might be 0.15-0.25% higher. That's when you can lock in another high rate short-term CD. Keep on going and you'll never have a liquidity issue.
In a flattening yield curve environment, then you'll want to consider building a CD step stool instead.
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About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world.
During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate six figures a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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