I know a lot of people who are opening CDs today. And I can understand why.
The nice thing about CDs is that they give you a guaranteed return on your money with pretty much no risk. All you need to do is bank at an FDIC-insured institution, and your money is protected as long as your deposit is $250,000 or less. And with many CDs paying APYs of 5.00% (or more) these days, it's hard to pass up that opportunity.
But while today's CD rates are definitely strong, a CD is not necessarily the best place for your money. And if any of these scenarios apply to you, you should absolutely stay away from CDs right now.
1. You need all of your savings to serve as your emergency fund
As a general rule, you should aim to have enough money in your emergency fund to cover three months of essential expenses -- such as rent, groceries, and utilities. That way, if you were to lose your job, you'd be able to pay your bills for a while without resorting to debt.
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Capital One 360 Performance Savings APY 4.25% Rate infoSee Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY)is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Open Account for Capital One 360 Performance Savings Member FDIC. | APY 4.25% Rate infoSee Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY)is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. | Min. to earn $0 |
American Express® High Yield Savings APY 4.25% Rate info4.25% annual percentage yield as of June 24, 2024 Open Account for American Express® High Yield Savings Member FDIC. | APY 4.25% Rate info4.25% annual percentage yield as of June 24, 2024 | Min. to earn $1 |
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If you currently have three months' worth of savings on hand, give yourself a pat on the back. That's a truly great accomplishment. But at the same time, don't stick that money into a CD. You need your emergency fund to be available to you at all times.
There can be costly penalties for cashing out a CD before its maturity date. So you're better off keeping your emergency fund in a regular savings account. The good news, though, is that many online savings accounts are paying APYs above 4.00% right now, so you're not losing out on so much interest compared to a CD.
2. You owe a lot of high-interest debt
The whole appeal of CDs right now is the returns they're offering. But if you have a lot of high-interest debt, you may be losing a lot more money to interest than what you might gain in a CD. So if that's the case, it makes more sense to use your cash to pay off some of your debt.
Let's say you owe $5,000 on a credit card with a 20% APY. If it takes you a year to pay it off, you'll lose $558 to interest. Meanwhile, if you put that $5,000 into a 12-month CD with a 5.00% APY, you're only looking at earning $250 in interest.
3. You're trying to save for retirement
You may be able to get a 5.00% APY on a CD right now. But if your goal in opening one is to put money aside for retirement, you should strongly consider investing that cash instead.
The reason? Over the past 50 years, the stock market's average annual return has been 10%. So you might earn a lot more with a stock portfolio than you will with CDs. And while investing does mean taking on risk, the reward can more than make up for it.
Of course, investing isn't something you want to do over just one year. You need a longer window than that to ride out potential market downturns.
But let's just say that hypothetically, you can get a 5% return out of CDs for the next 20 years. With a $5,000 deposit, that results in close to $13,300. But with a 10% return, in 20 years, your $5,000 could be worth about $33,600. That's about a $20,000 difference.
CDs may be all the rage right now. But think carefully before opening one -- especially if you're looking at tying up your emergency fund, passing up the chance to pay off high-interest debt, or hoping to grow your money for a far-off goal.
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FAQs
When the Federal Reserve increases its benchmark rate, interest rates across the economy, including CD rates, increase. Similarly, decreases in the federal funds rate cause CD rates to fall.
How are CDs affected by interest rates? ›
When the Federal Reserve increases its benchmark rate, interest rates across the economy, including CD rates, increase. Similarly, decreases in the federal funds rate cause CD rates to fall.
Are CDs a good investment right now? ›
The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022. Yet many banks are offering rates well above that—the best 5-year CDs have annual percentage yields (APYs) that exceed 4%, and some 1-year CDs are offering APYs well above 5%.
What is the reason that you will earn a better rate of interest on a CD over a savings account? ›
Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.
What is the advantage of a CD? ›
A CD may offer a higher interest rate and APY than a high-yield savings account or money market account. Returns are virtually guaranteed and you can easily estimate how much your money will grow. CD laddering strategies can help you to leverage changing interest rates and create liquidity.
Should I lock in a CD now or wait? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Can you get 6% on a CD? ›
It's possible to get a 6% certificate of deposit, but currently, they're only offered by credit unions, not banks. Pros of a 6% CD include locked-in interest rates and a relatively high rate of return.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
What is the biggest negative of putting your money in a CD? ›
You could get stuck with a lower interest rate than what becomes available. Savings account and CD interest rates can fluctuate. With a savings account, your money will automatically start earning a higher return if interest rates go up. With a CD, however, you'll be stuck with whatever rate you locked in initially.
Is 5 percent CD worth it? ›
If you have money to save that you won't need to touch for at least six months, a 5% CD may be worth considering. These CDs earn rates well above the national average CD and savings rates, according to the FDIC. However, you should consider more than just APY when deciding whether or not a 5% CD is a good investment.
When you open a CD, you lock in the interest rate for the entire term. If you open a CD when rates are low and rates then rise in a big way, it may be worth breaking your CD to secure a higher rate. For example, let's say that breaking your current CD will result in a $25 early withdrawal fee.
Do you pay taxes on CDs? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Why are CD rates so good right now? ›
CD rates benefited from a rising interest rate environment, while the Federal Reserve was raising the fed funds rate between 2022-2023.
Why is CD better than money market? ›
Higher Interest Rates Compared To Other Savings Options
CDs typically offer higher interest rates compared to regular savings or money market accounts. Generally, the longer a CD's term, the more interest it pays, helping offset the loss of liquidity.
Is now a good time to invest in a CD? ›
CDs are worth it in 2024 for the right investor. After rate hikes in the past year and a half, many of the best CDs yield well over 5% but these rates may not last for long. For some, it could be worth it to lock in high rates before the Fed starts cutting rates later in the year.
Why are CDs better? ›
CD's are lossless waves meaning they offer better sound quality than MP3s when encoding audio into digital form. Whereas vinyl records lose some higher frequencies in conversion; thus CD's can get louder and deliver clear frequencies even at high volumes.
Are interest rates on CDs expected to rise? ›
Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on June 11. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
Term Length | Average APY | Interest earned on $10,000 at maturity |
---|
1 year | 2.61% | $264.14 |
18 months | 2.21% | $336.74 |
2 years | 2.07% | $422.32 |
3 years | 1.94% | $598.77 |
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Where can I get 7% interest on my money? ›
7% Interest Savings Accounts: What You Need To Know
- As of June 2024, no banks are offering 7% interest rates on savings accounts.
- Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
What is the best CD rate for $100,000? ›
Best Jumbo CD Rates for June 2024
BEST NATIONAL JUMBO CDs | | |
---|
CD Bank | 5.20% APY | $100,000 |
Luana Savings Bank | 4.42% APY | $100,000 |
All In Credit Union | 4.13% APY | $100,000 |
Best non-Jumbo option: TotalDirectBank | 5.51% APY | $25,000 |
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