Invest in long-term CDs and earn better rates
Investing in long-term CDs is the best option for those seeking to earn better rates on their CDs. At the moment, CD rates have hit rock bottom and are really low. Many investors really wonder if it is worth investing in CDs and locking their money for a period of five, seven, or even ten years. So, it is now believed that investing in long-term CDs with a few reasonable penalties is a better option.
The average one-year CD rate is 1.00%, two-year CD rate is 1.20%, and 3-year CD rate is 1.50%. These are the prevailing rates in all the major online banks and credit unions. The rates are likely to remain low until 2013. Although no one can say for sure, the Fed has indicated that the rates are likely to remain the same until such time.
Hence, it has been believed that compounding will help in fetching better returns. So, if you plan to invest around $100,000 in a regular one-year CD, you would have earned $1,000 by the end of one year after it reaches maturity. CD rates are likely to remain the same and may not go down further. Assuming that it does not go down further, if you invest the money for another year, you will earn $2,000. However, if you had to select a five-year CD, you earning would have been double at $4,000. So, even if you have to break even while going into the third year, the one-year rates should have gone up to 4.00%.
Imagine you have opted for a five-year CD at 2.00% and the CD rates by the end of the 2nd year have gone up to 4.00% for five-year CDs. The credit unions and banks have an early withdrawal penalty of six-month’s interest if you plan to close the CD. So, you can pay up the penalty of around $997.26 and close the CD and then reinvest the balance money in a brand new five-year CD. This way, the $4,000 would be reduced to $3,002.74 and the earnings it will fetch for a period of two years would be 1.50% APY, which is $300 per year in higher earnings when compared to what the regular two-year CDs would have fetched. The next year’s earnings would be about $3,960.11 which is about $1,960 more when compared to what you would have earned. Use the early withdrawal penalty calculator if you wish to do some more research and make plans accordingly.
