How do CD Rates work?
When you take out a CD, the rate of interest you receive is normally tied to interest rate decisions made by the Fed.
When prices for consumers are high and inflation is rising, central banks tend to increase interest rates in an attempt to encourage people to save rather than spend. As a result, interest rates on products such as newly issued CDs will also likely increase. Be aware, however, that this isn’t guaranteed, and CD rates may not rise instantly.
As mentioned above, you’ll need to lock your money away for a set period of time—typically between 3 and 60 months—when you buy a CD.
Although banks and credit unions have different policies on early withdrawal penalties, the amount you pay is often determined by the term of your CD. Longer-term CDs tend to come with higher penalties.
Once your CD has reached its investment term, you can either withdraw your money or reinvest it into another CD.
How to Time the Best CD Rates
Deciding whether or not to buy a CD or when to buy, often depends on the likelihood of an increase or decrease in interest rates.
If the banks are about to cut interest rates, it might be a good time to buy a CD and beat upcoming rate reductions by locking in a higher rate.
Buying a CD could also be a good choice if you want a guarantee that you cannot lose money on your savings, as the terms of a CD will state that you will receive a set minimum amount when it matures.
A CD might not be appropriate if you may need to draw on your cash during the term of your investment. In this case, you may want to consider a more liquid investment such as an easy-access savings account.
As the terms of CDs vary greatly between different banks and credit unions, it’s essential that you compare as wide a range of products as possible when you’re choosing a CD.
Are interest rates going up?
The Fed has increased interest rates regularly since March 2022 from 0.5% to 2.5% to help bring the inflation rate down. Interest rates may continue to rise in the future, especially if the inflation rate keeps increasing. This will likely result in an increase in rates on most savings products.
Pros and Cons of Opening CDs
Pros | Cons |
Set return on your investment | Need to lock money away |
Higher interest rates than easy-access accounts | Penalties for early withdrawal |
Covered by government compensation scheme | Better returns available on the stock market |
CD vs HYSA vs Stock Market
Although savings accounts often provide more flexibility over when you can access your money, the most competitive CDs pay a far more attractive rate of interest than a conventional savings account. And, although you may potentially earn higher returns on the stock markets, there is also a risk that you could lose your entire investment.
CD Rates Today and Investor Safety
CDs are one of the safest investment options available to investors today. CDs that are offered by FDIC-insured banks are guaranteed by the government itself. CDs allow investors to safely store their savings while also earning a set rate of interest.
Such guarantees make CDs a safer option than investing in the stock market, where you could lose your entire principal if markets do not turn in your favor.
Choosing a CD term
When selecting your CD, you should first consider your plans for the money. If you need access to the funds for a specific deadline, you should choose a term that will enable you to tap into your cash by that date. However, you may receive a better rate if you can afford to lock your money away for longer.
Conclusion
Opening a CD is a safe and low-risk option for growing your savings. Before choosing any savings option, whether it is a CD, a high yield savings accounts, or the stock market, it is important to ask yourself these questions to make a fully informed decision and determine which option is right for you.
