Today’s best interest rates are miserly compared to the best rates offered in the past, and a search for high interest rates can involve risk. To be safe, it’s in your best interest to avoid bonds and/or shopping for the best interest rates. Some ads offering the best rates are misleading. Here’s your safest and best solution to today’s dilemma in interest rates.
Be careful in shopping for the best interest rates. Sure, bonds and bond funds may offer the best rates, but they involve considerable risk in today’s market. The price or value of these investments fluctuates… falling as rates rise. And be careful of advertisements that tout the best rates as well. Some of them appear to be FDIC insured like a bank CD (certificate of deposit) when in fact they are not even safe investments.
If you want the least risk and some of the best interest rates on a consistent basis year after year, you can put together your own package deal at your local bank or credit union. You won’t get the highest rate each year on each investment; but you’ll earn the best rates overall without locking yourself in and suffering the consequences if you need to get at some of your money.
For simplicity, let’s say that bank CD rates are as follows: 1-yr at 1%, 2-yr at 1.5%, 3-yr at 2%, and 4-yr at 3%. You don’t want to tie up too much at a higher rate because you may want access to some of your money. Plus, you can’t be sure about what will happen to rates in the future. What can you do with a lump sum of money and not worry about it? You build a bank CD ladder. Here’s how that would work with the bank CD rates above.
You start by investing an equal amount in each. Then each year as a bank CD matures you have the bank roll that money over into a new 4-year CD. This way you reinvest to earn the best rate, and always have a CD on hand that will mature within a year. For example, after one year your 2-yr CD has only one year to go. After two years your original 3-yr matures in a year and so on. This is the way the professionals do it, and you can too.
Many people today have a lump sum of money in an IRA that may have come from an employer pension plan. A CD ladder will work there, as well as in any type of account you want to set up at your local bank or credit union. If you want safety first, with the best interest rates year over year, build yourself a ladder with people you trust and know.
I generally suggest a balanced portfolio of stocks, bonds, and other investments; but I know from experience as a financial planner that some folks want zero risk and access to their money, plus the best interest rates possible. If that’s you, a bank CD ladder is as good as it gets even though CD rates aren’t what they used to be.