In the past, I used to go hunting for the best CD rates. Once a week I go yield hunting fo the best CD rates. I always like to have 5% – 10% of my investable assets in risk-free assets like CDs.
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 5%. 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.
The Best CD Rates Depend On Duration, Yield, And Duration
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. If so, 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.
Related: Build a CD step stool not a ladder
Match Goals With Duration And
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 1%, locking my money in a CD today is not the greatest.
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!
Instead Of Investing In CDs
In this low interest rate environment, I think it's best to invest more in rental properties and commercial real estate opportunities. The value of income-producing property has gone way up. It now takes a lot more capital to generate the same amount of risk-adjust returns.
The best CD rates are too low to allocate very much capital.
Take a look at my two favorite real estate crowdfunding platforms:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns. Performance has been especially strong during stock market downturns. Hence, Fundrise is good for diversification purposes and passive income.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I've personally invested $810,000 in real estate crowdfunding across 18 projects. I want to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Manage Your Finances In One Place
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Before Empower, I had to log into eight different systems to track 25+ difference accounts to manage my finances. Now, I can just log into Empower to see how everything is doing in one place. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around. It uses your real data to run thousands of algorithms to see what your probability is for retirement success.
Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There's no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
About the Author:
Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent the next 13 years after college working at Goldman Sachs and Credit Suisse Group. 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.
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