When saving money, most people want to maximize their returns while minimizing risk. One popular way to do this is through a certificate of deposit (CD), a type of savings account that typically offers higher interest rates than traditional ones. However, not all CDs are created equal. One type of CD that you may come across is a variable rate CD. This guide will explore a variable rate CD, how it works, and whether it is a good choice for your savings goals.
- What is a variable rate on a CD?
- Is the variable rate worth it?
- Should I take a variable interest rate?
- Where can I get a variable-rate CD?
- Are CD rates expected to go higher?
Understanding CD Basics
Before we delve into variable-rate CDs, it’s essential to understand the basics of CDs. CDs are a type of savings account that offers a fixed interest rate for a set period. Typically, this period can range from a few months to several years, and the longer the term, the higher the interest rate will be. In exchange for this higher interest rate, you must leave your money in the account for the entire term. You may be penalized or charged if you withdraw your money before the term ends.
What is a Variable Rate CD?
A variable rate CD is a type where the interest rate can change over time. Unlike traditional CDs, which offer a fixed interest rate for the entire term, a variable rate CD’s interest rate is tied to an underlying index, such as the prime rate or the LIBOR rate. This means that the interest rate can go up or down depending on changes in the underlying index.
How Does a Variable Rate CD Work?
When you open a variable rate CD, you will typically be given a range of interest rates that your CD can earn. For example, your CD may have an interest rate range of 1.00% to 2.50%. The actual interest rate you earn will depend on the performance of the underlying index. If the index goes up, your interest rate will go up; if the index goes down, your interest rate will go down.
It’s important to note that variable rate CDs may have caps or floors on the interest rate. A cap limits the maximum interest rate that you can earn, while a floor sets a minimum interest rate. For example, if your CD has a cap of 3.00% and a floor of 1.00%, your interest rate will never exceed 3.00% or below 1.00%.
Earn The Highest Interest Rates On Savings Today
Fixed annuities are almost identical to Certificates of Deposit (CDs) accounts and provide higher interest rates and penalty-free withdrawals for income.
|N/A||CloudBank Savings Account||5.05%|
|12 Months||Bread Savings CD||5.20%|
|24 Months||Idabel National Bank||5.05%|
|48 Months||Americo Fixed Annuity||5.05%|
|5 Years||Americo Fixed Annuity||5.25%|
|10 Years||American National||5.45%|
Disclaimer: This is a review. The Annuity Expert is not associated with a bank or credit union. However, fixed annuities are sold at most financial institutions. We aim to help you find the highest interest rates for your retirement savings. We may receive a small referral fee if you purchase something using a link in this article.
Pros and Cons of Variable Rate CDs
Like any investment, variable-rate CDs have their pros and cons. Here are some things to consider:
- Potential for higher returns: Since the interest rate is tied to an underlying index, you can earn higher returns if the index performs well.
- Flexibility: Variable rate CDs may offer more flexibility than traditional CDs since you can withdraw your money before the term is up without incurring penalties or fees.
- Protection against inflation: Since the interest rate can adjust with changes in the underlying index, variable rate CDs may offer some protection against inflation.
- Higher risk: Variable rate CDs are riskier than traditional CDs since the interest rate can fluctuate over time. This means you may earn less than expected if the index performs poorly.
- Lower initial interest rate: Since variable rate CDs are riskier, they may offer a lower initial interest rate than traditional CDs.
- Complexity: Variable rate CDs can be more complex than traditional CDs, so it’s essential to understand how they work before investing entirely.
Is a Variable Rate CD Right for You?
So, is a variable rate CD the right choice for you? Here are some factors to consider:
- Your savings goals: If you are saving for a short-term goal, such as a down payment on a house, a traditional CD may be a better choice since it offers a fixed interest rate for a set period. If you are saving for a longer-term goal, such as retirement, a variable-rate CD may be a good choice since it offers the potential for higher returns over time.
- Your risk tolerance: If you are risk-averse and want a guaranteed return on your investment, a traditional CD may be a better choice. Suppose you are willing to take on some risk to earn higher returns potentially; a variable-rate CD may be a good choice.
- Your financial situation: If you need to access your savings before the CD term is up, a variable rate CD may offer more flexibility than a traditional CD since you can withdraw your money without incurring penalties or fees.
In summary, a variable rate CD is a type where the interest rate can change over time based on an underlying index. While variable-rate CDs offer the potential for higher returns, they are also riskier than traditional CDs and can be more complex. Whether a variable rate CD is a good choice for you will depend on your savings goals, risk tolerance, and financial situation. Before investing in a variable rate CD, it’s essential to fully understand how it works and carefully weigh the pros and cons. By doing so, you can make an informed decision that will help you reach your savings goals.
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Frequently Asked Questions
What is a variable rate on a CD?
A CD with a variable rate means that its interest rate can fluctuate over time. The factors determining the interest rate depend on the institution. In addition, some institutions offer a variable-rate CD called a bump-up CD.
Is the variable rate worth it?
Based on historical data, variable rates are a more cost-effective option in the long run. If there is a substantial difference in the rates, paying extra for the stability offered by fixed rates may not be worthwhile.
Should I take a variable interest rate?
Depending on the terms of the loan agreement, a variable interest rate could be advantageous when interest rates are expected to decrease but may not be the best choice if rates are expected to rise.
Where can I get a variable-rate CD?
Banks, credit unions, and specific brokers offer variable-rate CDs, a savings accounts.
Are CD rates expected to go higher?
Based on interest rate forecasts for 2023 by economists, CD rates are expected to remain high and consistent. For example, Bankrate predicts a federal funds rate between 5.25% and 5.50% for 2023 and a national average of 1.8% for 1-year CD rates.