If you currently have a certificate of deposit, listen up: The Federal Reserve's meeting this week could mean big changes for your money.
Experts expect the Fed to cut rates at its upcoming Nov. 6-7 meeting. That means CD rates -- which have been on the way down since its September rate cut -- are likely to keep falling.
There are several smart moves you can make to protect your money from a rate cut. One of them is to check in on any CDs you have. Read on to learn why this is important and what to do when you check your accounts.
Why you should check in on your CD before the Fed's next meeting
Financial institutions typically set the rates they offer consumers based on the federal funds rate. If the Fed cuts its benchmark interest rate, banks and credit unions typically reduce the rates they pay on CDs. We've seen this happen since the Fed issued its first rate cut in years at its Sept. 18 meeting. The top annual percentage yield, or APY, for the CDs we track at CNET is now 4.75% -- a far cry from the 5.65% it was at the peak of high APYs in recent years.
Many CDs auto-renew when the term expires. That means your money is automatically rolled over into a new CD at the then-current rate. By knowing when your CDs mature, you can make sure you do the best thing with your funds in light of the Fed's anticipated rate cut.
What to do if your CD is maturing soon
If your CD term is ending soon, you have several options to choose from. Here's what you should do now before the Fed drops rates.Â
Review the CD's terms
Take a look at the terms and conditions of your CD, particularly:
- Maturity date: This is the date when your term expires and you have access to the funds you deposited. Make note of this date so you don't miss it.
- Grace period: This is a short window of time -- typically, seven to 10 days -- in which you can decide what to do with the money in your CD when it matures. If you don’t take action during this window, your money will usually roll into a new CD of the same term at the then-current rate.
- Auto-renewal: Most CDs come with an auto-renew feature. If you don’t act during the grace period, your money will be locked into a new CD at the then-current rate -- which could be significantly lower than you're earning now. Make sure you know if your account will auto-renew and what you want to do with the money when the CD matures.Â
Start shopping around for a new CD
If you won’t need access to the funds in your CD when it matures, you can roll them over into a new account. If that’s your plan, it’s wise to start looking into top CD rates now. Comparing your options as soon as possible will ensure you’re prepared when your account matures.Â
As you weigh your options, look beyond your current bank or credit union. Financial institutions regularly change the rates they offer to remain competitive. Your current bank may have been the best option when you opened your account, but you may find a better rate elsewhere in today’s market.
This may also be a good time to consider building a CD ladder. With this strategy, you divide your savings across multiple CDs with varying maturity dates. For example, say you have $10,000 to deposit. You could split that investment into five $2,000 accounts: one with a one-year term, one with a two-year term, one with a three-year term, one with a four-year term and one with a five-year term. As shorter-term CDs mature, you can withdraw the money or roll it into a new CD. This allows you to take advantage of competitive interest rates while providing regular access to funds.
Look into high-yield savings accounts
You don't have to roll your funds into a new CD if that option no longer fits your needs. If you’d keep your funds accessible while still earning a meaningful return, you may be better served by a high-yield savings account.Â
High-yield savings accounts work the same as traditional savings accounts but pay considerably more interest. Most high-yield savings accounts allow you to access your money fee-free up to six times per month, and many offer 10 times the national average rate (or more). Savings account rates are variable, so they can change at any time, but you'll still earn much more with a high-yield savings account than a traditional savings account.
If you plan to go this route when your CD matures, keep these things in mind to find the best account for you.
Should you withdraw funds from your CD early?
What if your CD won't mature for a while? Is there anything you can do to take advantage of rates while they're still high?
It’s usually a bad idea to take money out of a CD before the term is up. CDs often come with early withdrawal penalties that can reduce -- or even erase -- your earnings. In today's falling-rate environment, it may be wise to withdraw your funds early and pay the penalty to capitalize on high rates while they last.
Look up the early withdrawal penalty for your current CD and determine how much withdrawing your funds now would cost. Then, consider today’s best CD rates and calculate how much you would earn by putting your money into a new CD for the term you’re considering. If these earnings outweigh the penalties you'd incur, tapping into your CD early might make sense.
The bottom line
With the Federal Reserve expected to cut rates in the next few days, now’s the time to review your CDs. By knowing when they mature and what options you have for your funds, you can make the best decision for your money. Stay tuned to CNET for live coverage of the Fed meeting on Nov. 6-7 to learn more.
