CD account set to mature in today's economy? Do this next.
Knowing what to do with your extra money in today's economy isn't as straightforward as it has been in the past. On the one hand, easing inflation means that your dollars will stretch further. On the other hand, there's a chance that the Federal Reserve may cut rates later this year, which would likely reduce interest rates on popular deposit accounts such as certificates of deposit (CDs). Combined with market uncertainty impacting your investments, there's a general a lack of clarity about where the economy is headed. And that uncertainty will impact most facets of your financial life, including where you currently keep portions of your money.
If you've got a CD that's maturing soon, it's going to take some planning and smart decision-making to ensure you can maximize the money that's coming your way. There are specific things you should and shouldn't do, but knowing what those things are is a little more complicated with today's economic climate as the backdrop. So, do you have a CD account set to mature in today's economy? Below, we'll break down what to do next.
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What to do if your CD is set to mature in today's economy
Have a CD account set to mature in today's hard-to-predict economy? Consider making these three moves next to protect your money:
Don't let it automatically rollover
Some CDs have an automatic rollover feature that kicks in when your CD matures. Through this feature, your bank will automatically reinvest your CD deposit and earned interest into a new CD that's typically the same length as your maturing CD. Your interest rate will be based on the available rate at the time of the rollover
The advantage of an automatic rollover is that your money continues to earn interest without a break. However, it could be a costly move if the interest rate you earn on your new CD is lower than other options you had at the time of the rollover.
Additionally, if your original CD was a short-term account, rolling into a new short-term account may not be the best idea in today's economy. Why? Because when the CD matures, interest rates may be lower than they are now since there's a possibility that the Federal Reserve could cut rates this summer. If you want to open another CD at that point, you'll likely end up with a choice of annual percentage yields (APYs) that are lower than they are now.
To avoid this, contact your bank before your CD matures and let them know you don't want your CD to automatically rollover.
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Compare short-term and long-term options
Now that your CD is maturing, you have a choice between opening a short-term or long-term CD. Both options have benefits in today's economy.
Short-term CDs, which have maturities of one year or less, tend to offer better APYs than long-term CDs right now. So, if you choose to deposit your money into a short-term account, you're likely going to get a great rate.
Long-term CDs, which have maturities of longer than one year, typically have slightly lower rates than short-term CDs right now but give you a considerable advantage: rate stability. With the possibility of rate cuts coming later this year, a long-term CD allows you to earn a good rate that won't change before maturity if, for example, long-term CD rates drop by 0.25% or 0.5% later this year.
"Given the expectation of lower interest rates, [long-term] CDs are a way to lock in an interest rate for a longer period of time," says Teri Williams, president of OneUnited Bank.
If you like the benefits that short-term and long-term CDs offer but can't choose between the two, consider using both in a CD ladder, says Jasmine Ball, founder of financial planning firm Bamboo Financial Partners. Ladders give you the advantage of a long-term CD's rate protection with the liquidity that short-term CDs provide.
"If you're unsure, a CD laddering strategy — where you invest in multiple CDs with different maturity dates — can give you the best of both worlds: steady returns while keeping some funds accessible in the near future," Ball says.
Keep the funds in some sort of high-earning account
If your CD is maturing soon and you haven't done a lot of research into short-term and long-term CD rates and benefits, you might be inclined to opt for the easiest solution for your maturing CD: moving your deposit and earned interest into a low-interest savings account you've had open for years.
In today's economy, this is a costly decision, as your savings account's interest is likely far below the top rates for CDs and high-yield savings accounts. For example, you can open a two-year CD with a rate of 4.15% today, according to Bankrate. At 4.15%, a $10,000, 2-year CD could earn $847.22 at maturity. A savings account with today's average rate of 0.41%, would earn $82.17 at maturity. And that's on the assumption that the 0.41% rate will remain the same over those two years. It could drop, as savings accounts have variable rates subject to change based on market conditions.
Because deposit-account interest rates remain relatively high right now, it's worth the few minutes of research it takes to identify a CD or high-yield savings account that can generate at least a 4% return on your maturing CD's deposit and earned interest.
The bottom line
In the current volatile economic climate, taking a few minutes to decide what you want to do with your maturing CD is well worth the time. Avoid letting your CD automatically renew, as this blocks the possibility of moving your money into another CD that earns a higher APY. As you decide what term works best for you, remember that short-term CDs have higher rates right now, but long-term CDs offer extended protection from rate changes. And, if you have money from a matured CD that you don't know what to do with, try to find a high-yield alternative to just moving the cash into a low-yield savings account you already have.
