Certificates of deposit (CDs) aren’t the most exciting financial product — but they are hot, hot, hot right now. This is thanks to a higher federal funds rate, a result of the Federal Reserve’s efforts to cool inflation.
Many experts still believe we could see rate cuts later this year, though — and the unique nature of CDs is such that you get to lock in the rate when you open one. So even if the federal funds rate inches downward and the best CDs start paying just 4%, if you’ve already opened one at 5%, you are set for the duration of your CD’s term.
Here are three great reasons to jump on the CD bandwagon this month — and one reason not to.
1. Taking advantage of those high rates
OK, you knew I was going to start with this one! It’s honestly the best reason to open a CD right now, provided you have the cash to spare. As of this writing, you can open a shorter-term CD (with a term of one year or less) with a rate of 5.15%. And that’s a guaranteed rate, since you lock it in when you open the account.
Sure, you might expect a long-term average annual return of 10% on the money you invest in the stock market (based on its average returns over the last five decades), but you can’t rely on those kinds of returns in the short term. Stock values swing up and down. You’re not guaranteed any kind of return, and might in fact lose money if you’re not patient enough.
But if you have $5,000 you can part with for a year, you could earn almost $264 on it in a 5.15% APY CD that compounds your interest monthly. You can run the math and find out exactly how much you can earn going in. And since CDs are one of the account types insured by the FDIC, up to $250,000 of your money will be safe in case of bank failure, too.
2. Using a short-term investment vehicle
If you already have money in a retirement account, such as a 401(k) or IRA, you might wonder what the point of CDs is for you. And yeah, I get it — CDs aren’t a great investment option if retirement is many years away. The stock market is a smarter bet for retirement savings.
But what if you’re waiting a few years (say, less than five) to buy a home, have a big wedding, or send your child off to college? A CD could be a great choice in any of these circumstances, where you have a shorter and set deadline for the money. Since CDs come in a range of terms (three months to five years are the most common), you can literally match a CD to your goal, deposit money, lock in your rate, and wait for it to expire — at which time, you’ll be a little richer.
3. Beating inflation
According to April’s Consumer Price Index report, as of this writing, inflation currently stands at 3.4% year over year. Money that isn’t earning at least that much is actively losing value to inflation. And unlike in June 2022, when we saw 40-year record-high inflation at 9.1%, you actually can keep your money from losing spending power in a bank account right now. Remember how the best CDs are currently paying 5% or better? That’s inflation protection right there.
One reason not to open a CD this month
It would be remiss of me not to caution you about using CDs for money you can’t afford to part with for a set term. Namely, your emergency fund — don’t put it into a CD, even at 5% APY, even for only one year. Just don’t do it. CDs are best for money you know you won’t need at a moment’s notice — like the cash for the big dream vacation you’re taking in 2026.
If you put your emergency fund into a CD and then have an unplanned expense, you’ll be forced to break the CD term. You’ll lose a portion of the interest you’ve already earned (or maybe all of it). And depending on the bank’s standard early withdrawal penalty and how far into the CD term you are, you might even lose some of your principal balance. So don’t risk it.
Ready to open a CD this month? Have a gander at the best CD rates right now and pick out a winner!
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