Interest Rates ‘Last Call:’ Get 5% Before It’s Gone

Cash isn’t trash anymore thanks to 10 hikes to interest rates from the Federal Reserve. But the fattest yields in two decades won’t stick around forever.

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Now might be a good time to lock in plump risk-free yields on certificates of deposit (CDs), money markets and high-yield savings accounts. Indeed, the clock may be ticking on one-year CD yields north of 5% and peak yields near 4.75% for more liquid savings accounts.

“These levels aren’t likely to last for long,” Linda Mazziotta and Justin Waring of UBS Global Wealth Management noted in a recent report.

The reason: the Fed hinted last week that it may be moving to the sidelines. Markets have also started pricing in concerns related to banking sector stability and slowing economic growth. The bottom line? Rates could start pulling back.

Last Call For Savers For High Interest Rates

And if rates aren’t going up further and are more likely to stay where they are or move lower, there’s limited upside on yields on cash accounts going forward.

“This could be last call for savers,” said Greg McBride, chief financial analyst at Bankrate.com, a personal finance site. “This would be the time to lock in.”

If you’re thinking about opening a new account to earn more on your cash, you’re not alone. Four of 10 U.S. adults are more likely to consider a long-term savings investment today than they were a year ago, a recent survey from Seattle Bank, a digital bank that in May rolled out CD Valet, a nationwide CD comparison tool.

So, now’s the time to map out a game plan to take advantage of solid yields.

When Do You Need The Money?

The first thing you must do is narrow your search based on your time horizon to ensure you’re parking your cash in the right type of account. The big benefit of these accounts, of course, is your principal is secure up to $250,000 in FDIC-insured accounts. So, the money will be there when you need it, no matter how financial markets perform.

If you need to refortify your rainy-day fund or gain access to your money in six months for a car down payment or vacation, you should be focusing your search on money market accounts and high-yielding savings accounts. Why? These accounts are liquid, which means you can make penalty-free withdrawals any time. And you don’t have to lock your money up for a specified time period as you would with a CD.

But if you have a little more time before you need your money, say three years or five years for a home down payment, you should consider locking in current rates on a three-year or five-year CD. Remember, if you withdraw funds from most CDs early, you will be hit with an early-withdrawal penalty that will eat into your interest earned.

Shop Around For The Highest Interest Rates

Just as you comparison shop when you’re buying a new car or homeowners insurance policy, it pays to shop around for the best yields on your savings. Simply walking to your bank branch with a well-known name in your hometown, though, might not get you a competitive yield.

That’s because the big banks are deposit-rich and not in desperate need of fresh cash to lend out. So, they are less likely to entice you with a fat yield. For example, you can fetch over 4% on many money market funds now, but Bank of America (BAC) and JPMorgan Chase (JPM) will pay you just 0.01% on money markets, according to Bankrate data.

Indeed, a review of top-yielding CDs at Bankrate.com found 12-month CDs paying 5.25% and 60-month CDs yielding 4.5%. Similarly, yields of 4.75% were available for money markets and yields a tad higher than that could be found in high-yield savings accounts.

High Interest Rates Tip: Go Digital

To cash in on higher yields, you may have to deposit your money with a digital bank, a lesser-known bank, or a financial institution far away from your home.

“The reason you may not have heard of these banks that are routinely competitive is because they’re located in a different part of the country, don’t have branches all over town, or have their name on stadiums,” said McBride. “The way they compete is paying an attractive yield  in order to bring in deposits they need to fund lending.”

You also must be open to opening an account online with a digital-only bank. Just as you buy tickets online for plane tickets, or make dinner reservations online, you might have to open a CD online to get the highest yield.

“You want to send your money where it’s going to be welcomed with open arms and higher yields,” said McBride.

Ways To Lock In High Yields For Longer

The problem with savings or money market accounts is you can’t lock in rates for a specified period of time. That’s where CDs come in.

Let’s say your goal is to lock in a predictable stream of income for the next few years. While a 12-month CD will offer you a yield of 5% or more, you can still lock in a slightly lower rate of 4.5% for five years. “It’s been a long, long time since you’ve been able to do that,” said McBride.

And locking in that still-solid 4.5% rate for longer might be prudent if yields eventually fall and the amount of interest banks pay depositors begins to shrink.

Consider Building A CD Ladder

Another way to build a predictable income stream at competitive yields is to build a so-called CD ladder, says McBride. “Laddering isn’t a yield maximization strategy, it’s a yield diversification strategy,” said McBride. “You’re diversifying among a range of maturity dates.

Here’s how a five-year CD ladder works. Say you have $50,000 in cash. You would put $10,000 each in five different CDs with different maturity dates. You’d invest equal amounts in 12-, 24-, 36-, 48- and 60-month CDs. Based on current rates you’d earn roughly 5% for the one-year CDs and about 4.5% for the CDs maturing in years two through five.

The benefit of this strategy is you’re locking in a predictable stream of income for the next five years. What’s more, by having one of the five CDs in the ladder maturing every year, you also gain the ability to either reinvest the proceeds or get access to the principal of one of the CDs every 12 months.

And despite the recent turmoil in the banking sector, McBride says your money is safe if it is deposited in an FDIC-insured bank and you don’t bump up above the $250,000 deposit threshold. “As long as you’re protected by deposit insurance you don’t have to worry about a bank failure,” McBride says.