CD yields are falling. Is it time to lock in?

With the Federal Reserve’s quarter-point cut last month in its funds rate, you can expect yields on short-term CDs to fall. Where can you still find a good return on your money, and which term is best for you?

Start your search on Tropical Financial Credit Union's CD webpage. Look for special offers on terms ranging from three months to five years.

Here’s what you should know before you begin hunting CDs:

• The Federal Reserve Open Market Committee’s actions affect short-term yields the most. CDs with terms of three months to one year have historically moved in the same direction as the Fed’s action, albeit slower and often by fewer percentage points.

• CD yields vary by market. When setting rates, financial institutions take into consideration the local economy. If it’s strong, they can offer better returns. If it’s weak, they may drop returns below the national average because there’s less loan demand.

• Not all accounts that look like CDs are federally insured. Newspaper and online advertisements touting high returns may state in the fine print that they are offering an investment that pays a fixed return with a disclaimer on its safety. True CDs include a statement in the ad or on a webpage that the funds are insured by the National Credit Union Share Insurance Fund with its NCUA logo or the Federal Deposit Insurance Corporation with its FDIC logo. The same information must appear in the paperwork for opening the account.

Which CD term is right for you? The answer has two parts: How soon will you need the money, and which term pays the best return? Historically, the longer the term, the bigger the number. That wasn’t the case in recent years when the Fed regularly boosted its funds rate to cool inflation. As a result, CDs of one year or less paid significantly higher returns than those of longer than one year.

The yield curve, as it’s called, is returning to normal, but as of late September, the national average annual percentage yield (APY) on a one-year CD was still higher than that on three-year and five-year CDs, according to Bankrate.

Knowing that you are still better off with CDs of one year or less, the remaining question is for how long – three, six or 12 months? The most crucial factor is how soon you think you might need the money. Let’s say you plan to buy a new vehicle in April or May of next year. You could earn a higher yield on the down payment by moving the cash from a savings account into a six-month CD.

If you plan to buy a home in January, you don’t want to lock up your money for more than three months. Could you put the funds into a six-month CD for a higher return and cash out early? Yes, but you would likely incur an early withdrawal penalty that would wipe out the interest gains.

In the end, what counts most is peace of mind. You will know that your money is deposited with a federally insured institution, that you will have access to it when needed, and that you took action before rates fell further. In these economic times, those assurances mean much more than earning a few extra tenths of a percentage point.