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CD rates are up right now. But that’s not the main reason why it pays to open a CD. Read on for all the details. [[{“value”:”
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It’s not every day that you’re in a situation where you have money to spare after paying your bills — especially these days, given how expensive everyday living expenses have gotten. So when you do have extra funds you don’t need for expenses like rent and groceries, it’s natural to want to use that money to better yourself financially.
In that regard, now could be a great time to open a CD. With CD rates sitting at their highest level in years, you have a prime opportunity to earn a risk-free return on your cash. This assumes that you bank somewhere that’s FDIC insured.
Another thing you should know is that today’s CD rates aren’t going to stick around forever. The reason they’re so strong is that the Fed spent much of 2022 and 2023 hiking up interest rates to battle inflation. But once the Fed moves forward with rate cuts, which is expected to happen at some point in 2024, CD rates are likely to fall in short order. So now’s really the sweet spot for opening a CD.
But don’t just throw money into a CD because rates are up. Rather, do it because that’s what makes sense given your financial goals.
Don’t just chase an impressive rate
With CD rates sitting at or above 5.00% for some products, it’s easy to see why the idea of opening a CD today holds a lot of appeal. But the best reason to open a CD right now isn’t to earn 5% on your money — it’s because a CD fits into your financial plans.
A 5% return sounds really neat — until you realize that over the past 50 years, the stock market’s average annual return has been 10%. And that 10% accounts for both strong years and periods of decline. And while investing in stocks does carry more risk than putting money into a CD, the reality is that when you’re looking at earning twice the return, that risk is easier to cope with.
But investing in stocks isn’t always the right move. And depending on your savings goal and timeline, a CD could make a lot more sense.
If you’re in your 30s or 40s and trying to build a retirement nest egg, then by all means, turn to the stock market. You may be looking at using your money in 20 to 30 years, which gives you plenty of time to ride out a stock market downturn.
But as a general rule, it’s not a good idea to invest money you may need in five years or less. So if that’s the sort of time frame you’re looking at for a particular goal, then a CD may be a better bet.
Imagine you’re saving to buy a home. You’re not sure if that’ll be possible in 2025, 2026, or 2027, but you’re hoping to become a homeowner at some point in the next three years. In that case, investing your down payment funds in stocks is a dangerous move, because if your portfolio loses value, it may not recover for years. But if you open a 12-month CD, you can earn a risk-free return on your money and then have those funds become available in a year’s time to put toward a home purchase.
Think things through before opening a CD
A lot of people you know may be rushing to open CDs right now. Hopefully, that’s the right decision for them. But that doesn’t make it the right decision for you.
You should open a CD if you’re saving for a near- or mid-term goal and want a risk-free return on your money for a limited period of time. Otherwise, consider stocks for long-term goals. And look at a regular savings account if you think you might need money in the very near future, such as for emergency expenses.
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