Will consumers benefit more from CD laddering or flexible CD’s

Traditional CD options are governed by rigid rules and hence considered unattractive to customers.  However with changing times CD’s have become a more flexible savings option as the new-age CD’s cater to the present scenario.

The basic concern that a customer has is:

  • CD’s have rigid rules and customers cannot withdraw the funds for a certain period of time.
  • There is a possibility of getting returns that are not optimal in case of rise in interest rates.

Hence the high-yield online savings accounts are considered a better option.  However, the more savvy customers will use the facility called ‘CD laddering’ where the yield on their savings is optimized without having to forego too much money.  However, the CD laddering also has its limitations.  It is ideally suited for those with a heavy cash flow and for long-term thinkers.

But for those customers who have a commitment phobia CD’s are thought of more as a financial product which allows customers with smaller funds and shorter time frames to get better returns.

The no-penalty CD is an option for those that do not wish to lock their funds for a few months or a years’ time (unless a penalty is paid) the no-penalty CD is a good option.  This type of CD offers customers to withdraw their funds with no penalty.  These CD’s are sometimes known as liquid CD’s where the CD could be liquidated before the period of maturity.  Here the entire balance will have to be withdrawn or interest rates might be cut while withdrawing.

The second major concern for an investor is the hike in interest rates in the future.  Investors do not like to get stuck with lower interest rates when they could earn much more.  Hence, the bump-up CD’s were introduced to customers so that they need not live with this uncertainty.  In this scenario, the bump-up CD offers clients the opportunity to bump-up their CD’s on a couple of occasions.  Here the customers will have the option to inform their banks about the hike in rates and their rates in turn would be hiked up to match the current rates offered by the banks.

However, there are some banks which dictate terms that the customer could opt for an increase in rate only if the CD is for a certain fixed period of time or the term on the CD may be extended after the requisition of the rate increase.

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