Is a 5-Year CD a Smart Investment Right Now?

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A five-year CD could earn you a high yield, but you’ll have to lock your money away for a while. Here’s how to know if this is the right move for you. 

Investing your money in the stock market is one of the smartest ways to grow your wealth over the long term, but not everyone is comfortable taking that kind of risk. If you’re worried about losing money in the short term, you might consider putting your money in a certificate of deposit (CD) instead.

Five-year CDs typically offer some of the highest rates, but if you open one of these, you’re agreeing to lock your money away for a long time. Here’s how to know if that’s the right move for you right now.

How CDs work

CDs enable you to earn a high annual percentage yield (APY) on your savings if you agree to leave your money untouched for the length of the CD term. This could be anywhere from a few months to a few years, depending on the CD you choose.

A five-year CD is the longest term that many banks offer. And to incentivize you to leave your money alone for that long, these CDs generally offer higher rates than shorter-term CDs. But you have to remember that you lock in your rate for the full term the moment you open the account.

Opening a five-year CD can be a lucrative decision when interest rates are falling. By locking in a high rate, you’ll probably earn more in interest than you could with a high-yield savings account over that same time. That’s because the savings account’s interest rate isn’t locked in and will rise or fall based on economic conditions.

But it may not be a great choice when interest rates are rising. In this case, it’s possible that CD rates could rise in the future, but you’d be stuck earning the same lower rate you started with. So it’s always important to look at what interest rates are doing before deciding whether to open a five-year CD.

Is now a good time to open a five-year CD?

Interest rates have been climbing over the last few years as the Federal Reserve attempts to combat the high inflation we’ve all been dealing with. Though many had hoped the rate hikes would end soon, the Fed’s chairman, Jerome Powell, recently indicated that more interest rate hikes could be coming later this year.

This isn’t great for anyone looking to borrow money affordably, but it’s also not great news for those invested in long-term CDs right now. Rising interest rates could boost the APYs of new five-year CDs. But if you open one today, you’ll miss out on the chance to earn the better rates that could be forthcoming.

A better solution might be to keep your extra cash in a high-yield savings account right now. These offer APYs that are close to what many of the best long-term CDs are offering, and you could earn even higher APYs in the future if the Fed initiates another rate hike.

Those who really want to invest in CDs could also opt for a shorter term length instead. This way, your money isn’t locked up for as long. If rates have risen by the time the CD term is up, you can move your money where it’ll earn you even more.

Many banks recognize that short-term CDs are more popular right now, so they’re offering especially competitive rates for terms of six months to one year. This might be a good place to start if you are looking to earn a high yield on your savings right now.

It doesn’t hurt to compare a few CDs before deciding which — if any — is right for you. Just make sure you review the terms of whichever account you sign up for, so you aren’t caught off guard when you need to withdraw your cash.

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