One choice is to buy protection with one of the proliferating “step up” or “bump up” CDs. The former schedule rate hikes at regular intervals; the latter allow savers to bump up their rates once or twice during the certificate’s term. Think three times before you sign up for either type. In return for the chance to get a higher rate during the CD’s life, you’ll likely be earning a lower-than-average return right now, says Robert Heady, publisher of the Bank Rate Monitor in North Palm Beach, Fla.
A better bet is a technique preferred by the pros: build a CD “ladder” of maturities. Divide your CD nest egg into six equal amounts of money. Use it to buy a six-month certificate, a one-year certificate and certificates in 18-month, 24-month, 30-month and 36-month maturities. As each comes due, reinvest it in a new 36-month certificate. In three years you’ll be earning three-year rates on all of your CD money, but you’ll have cash to invest every six months. This strategy avoids the danger of having your entire nest egg tied up for years if rates rise, while giving you a chance to keep enjoying today’s yields if rates fall. Best of all, it insulates you from the leading cause of rate stress: having to predict which way rates are going.
Of course, if you do know which way rates are going – and you think they’re going up – there’s an even better alternative. Just buy 90-day certificates and keep renewing them until you think that longer-term rates have hit their peak. At that point you can switch into a five-year CD. If you’re this hungry for yield, you’ll probably want to know where to get the absolute best rate. This week’s winner is California’s First Bank of Beverly Hills, which offers a 5.03 annual rate on its three-month CDs.
