CD Investors Must Come to Terms With 2 Harsh Realities

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CD investors have benefitted from high rates, but this isn’t actually good news. Here are two truths to reckon with if you want to invest in CDs. [[{“value”:”

In the post-pandemic era, CD investors may be feeling as if they’ve had it pretty good. Rates have been upward of 5.00% for the first time in a long time. It’s even possible to get short-term CDs paying great rates so you don’t have to commit to locking up your money for years to earn high yields.

But, while this picture may seem like a rosy one, there are actually two harsh realities that those investing in CDs should face.

1. CD rates are only high because of surging inflation

There’s a very unpleasant reason why CD rates are so high and have been for a while.

Since the COVID-19 pandemic, inflation has surged and hit multi-decade highs. In 2022 alone, the inflation rate was a whopping 8.00%, which is all but unheard of in the modern era. In fact, until 2021, when inflation hit 4.7%, the highest inflation rate since 2000 was just 3.8%. That happened the year of the 2008 financial crisis.

Inflation means the price of everything goes up and the buying power of your savings goes down. It doesn’t do you much good to earn a 5% return on a CD if everything you buy is 8% more expensive than it was before. Sure, you have more money on paper — but it buys you less.

Inflation is especially bad news for savers because it’s unlikely that all of your savings is going to earn a return on investment that keeps pace with it. Investors in CDs would be far better off if rates were a lot lower but inflation was, too.

2. You’re giving up liquidity for very little benefit

Sadly, those who are investing in CDs are giving up a lot of liquidity and taking on a lot of interest rate risk for very little gain.

When you put your money into CDs, you have to keep it locked up for the duration of the CD’s term. You can’t access it. If interest rates go up while you’re locked in, you can’t take advantage of the new better rates. You’re tying your money up and, in recent years, you’ve gotten very little benefit for doing so.

That’s because, right now, high-yield savings accounts are offering comparable rates to CDs or, in some cases, better rates than CDs. Normally, CDs provide higher returns to convince you to commit your money, but that’s not happening right now.

Since you can get the same great returns on a savings account without giving up your ability to use your money when you want to, there’s really very little benefit at all to investing in CDs.

The only upside is that you get to lock in the high rates for the duration of the CD term. But that’s not such a great benefit right now because it’s mostly short-term CDs offering ultra-competitive returns anyway.

CD investors need to face these two harsh truths. For most people, it would be better for CD rates to fall and inflation to return to more normal levels — and it would likely be a smarter financial choice to stick with high-yield savings accounts in the meantime.

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