Savers pile money into bank CDs as rates top 5%

Banks are again competing for deposits after being reluctant to do so for several years. And the fallout from Silicon Valley Bank’s deposit exodus, which was shut down by regulators, showed just how much banks need to keep customers around.

The average yield on a 12-month CD is 1.59%, but the best-yielding 12-month CDs available nationally are now between 5% and 5.25% as of Thursday, says Greg McBride, chief financial analyst at Bankrate. Capital One, Synchrony Bank and Forbright are some of the banks that offer 5% returns for 11 to 14 months. (If you put $20,000 into a 14-month Synchrony CD, it would be $21,000 at the end of the term.)

Rates on CDs and savings in general have been so low for so long that many savers were unaware of their existence or had largely forgotten about it.

Kimberly Paige Valor said the money she deposited in a regular savings account after selling her late mother’s house in 2015 earned almost no interest. The 47-year-old hairstylist and real estate agent in Waretown, NJ, recently started noticing ads for CDs on social media, on TV, and in letters from her bank. A financial advisor suggested a range of other options, but the CD’s safety and 4.5% interest rate were appealing, so she put $10,000 in a 13-month CD to get started.

“I’ve never done this kind of thing before,” Ms. Paige Valor said. “If I lost money, I would beat myself up for it for the rest of my life.”

The Fed’s campaign to quell high inflation by raising interest rates is making CDs more attractive to savers, along with similar fixed and forgotten assets such as I-bonds, inflation-linked government savings bonds.

While I Bonds will still earn 6.89% through April 30, when interest rates adjust, deposits are capped at $10,000 and depositors are required to navigate the somewhat clunky TreasuryDirect site. Most banks and credit unions offer CDs and allow larger deposits and have fewer restrictions.

When CDs make the most sense

CDs work best for relatively short-term savings goals, such as a down payment on a home, financial advisors say.

They don’t fit everyone perfectly, Mr. McBride said. Before opening a CD, it pays to look around and think about what you need the money for, when you think you’ll need it back and how much risk you’re comfortable taking, advisers said. Withdrawing funds before the term of the CD expires will incur a penalty, typically equal to three to six months’ interest.

It may be worth comparing other savings options, as the difference in interest rates between CDs and high-yield savings accounts may not be enough for some savers to risk tying up the money for a year or more. In a high-interest savings account with a 3.75% yield, $1,000 becomes $1,037 within a year. On a CD with a 4.25% return, that’s $1,045 per year.

For those who can tie up their money, opening a CD can be a low-risk way to diversify your financial portfolio and can instill discipline for novice savers, said Augustine Hong, general manager and partner of Alexandria Capital, an investment management firm. firm.

The benefits of locking your money

For some savers, the early withdrawal penalty may make it easier to act in their best interests. Psychologists and behavioral economists call this a commitment device, a way to achieve the desired results by making it difficult to do the wrong thing.

CD might as well stand for commitment device, as the penalty can make sticking to savings goals easier.

“Even if the punishment still doesn’t feel that great in financial terms, if you add in the psychological layers of breaking promises to yourself and feeling the suffering of experiencing a loss, it can serve as an effective tool for commitment said John Beshears. , a Harvard Business School professor who studies financial behavior.

Rowen Bell, a 51-year-old who works for a major accounting firm, opened a CD in his Fidelity IRA in December. Allocating a portion of his retirement savings to CDs made sense because interest rates were rising, he said. At the moment, a balance equal to 20% of his pension savings is on a CD of six months, nine months and twelve months. That’s a temporary strategy, he said.

“I’d be surprised if I still spent 20% of my IRA on CDs a year from now,” Bell said. “But right now, that kind of assignment feels good to me.”

Write to Oyin Adedoyin at [email protected]