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Higher interest rates were good news in 2023 for savers who were able to earn the best rates on their cash in years.
Even with the possibility of looming rate cuts by the Federal Reserve, 2024 still stands to be a great year for returns on cash.
“Yields are going to move lower this year,” said Greg McBride, chief financial analyst at Bankrate.
“But it’s still going to be a very good year for savers — especially those that lock in now,” McBride said.
When to expect interest rate cuts
Experts are taking bets for when interest rate cuts may come this year after a series of rate hikes aimed at tamping down high inflation.
“This is the first time in a very long time we’ve seen yields as high as they are,” said Douglas Boneparth, president and founder of Bone Fide Wealth, a wealth management firm based in New York City. Boneparth is also a member of the CNBC Financial Advisor Council.
Much of the Federal Reserve’s decisions from here will depend on inflation data. The latest read of the consumer price index was hotter than expected, with inflation up 3.4% over a year ago and still higher than the Federal Reserve’s 2% target.
Federal Reserve Governor Christopher Waller said on Tuesday that the central bank may take its time and move carefully with any future rate cuts.
Interest rate changes probably will not happen before June, McBride predicts.
‘Now’s the time to lock in’ CD rates
With no more interest rate increases on the horizon, that means the returns on cash have likely reached their highest point.
“If you’ve had your eye on a multiyear CD, now’s the time to lock in. The yields have peaked,” McBride said.
Certificates of deposit are products typically provided by banks or credit unions that promise a certain return provided the money is not withdrawn for a certain length of time.
Short-term CDs, which may have terms from three months to one year, may be poised to change more quickly, especially as the possibility of interest rate cuts comes closer, McBride said.
Top six-month and one-year CDs are currently providing annual percentage yields around 5.5%, according to Bankrate. Longer three-year and five-year CD rates are lower, with top rates of 4.75% and 4.6%, respectively.
One advantage of CDs is they provide a “risk-free return,” according to McBride, because they are covered by Federal Deposit Insurance Corporation insurance and require savers to go directly through a bank. However, savers may want to consider whether Treasurys, which are exempt from state and local taxes, may be a better deal, he noted.
An important caveat to consider is that the Federal Reserve’s anticipated rate decreases may not come to fruition, noted Boneparth. If the economy moves in another direction, the central bank’s strategy may change.
When a CD might not be the right choice
Before locking money in a CD, experts say it’s wise to consider whether that is the right place for your money.
If you need the money before the CD matures, you will have to pay early withdrawal penalties, noted Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, a financial advisory and wealth management firm based in Atlanta. Jenkin is also a member of the CNBC FA Council.
Consequently, you should have a liquid emergency fund before you lock any cash in a CD, he said. Experts generally recommend having three to six months’ living expenses set aside in case of a sudden loss of income or other unexpected event.
Top online savings accounts are still providing annual percentage yields over 5%, McBride noted. However, those rates are not guaranteed and may be subject to more fluctuations as the timeline for the Fed’s interest rate cuts becomes more certain.
Above all, it’s important to match your money allocations to the time horizon for your goals.
For big, long-term goals such as retirement, you still stand to earn the highest returns by taking more risk and putting your money in the markets, noted Boneparth.
“If you chose cash as your preferred asset class last year, instead of equities, you clearly missed out in a very big way,” Boneparth said.
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