4 reasons why you should open a CD now
If you want your savings to grow without taking on much investment risk, you don't have to limit yourself to a traditional checking account or savings account. Another option is to put money into a certificate of deposit (CD).
While there are a few different types, a traditional CD involves depositing money with a bank or credit union for a designated period of time, in exchange for a fixed annual percentage yield (APY).
For example, you might put money into a 1-year CD, meaning you generally leave the money in that account untouched for one year, after which you can withdraw the principal plus the earned interest. If you have to take out the money early, you typically have to pay a penalty, which often means giving up some of the interest you would have earned.
A CD might last for a few months or several years, depending on what the financial institution offers and what you prefer. Typically, the longer the CD duration, the higher the interest rate. You can have multiple CDs of different durations, such as if you want to set aside some money in a 5-year CD to gain a higher APY, while putting some other funds into a 1-year CD so that not all of your money is locked up so long. Doing so can be a good way to earn income without buying complicated financial products.
If you're thinking of opening a CD then start by checking today's CD interest rates to determine if it makes sense for you or simply use the table below to explore some local options.
4 reasons why you should open a CD now
Specifically, some of the top reasons why you might open CDs now include the following:
- Can earn more interest than other accounts
In general, CDs pay higher interest rates than checking accounts or savings accounts, especially with longer-duration CDs.
For example, the national savings account average rate is 0.35% as of February 2023, according to the Federal Deposit Insurance Corporation (FDIC). A 1-month CD pays an average of 0.18%, so it probably wouldn't make sense to do that right now, but a 3-month one pays 0.61%, according to the FDIC. And a 12-month CD pays 1.36%, so if you can set aside funds for a year, that could earn multiple times the interest that you'd get in a savings account.
Keep in mind that these are just averages. If you shop around, you can likely find CDs that pay much higher rates, such as around 4.5% for a 1-year CD, as of March 2023. Use the table below to explore some high-interest-rate CD offers now.
2. Locks in rates
High-yield savings accounts might advertise a high upfront rate, but these can fluctuate over time. If the Fed eventually lowers interest rates, then banks would likely drop yields on checking and savings accounts too.
But if you put money into a 5-year CD, for example, you'll continue to get the same rate throughout those five years, regardless of what the Fed does.
On that note, longer-duration CDs actually have lower interest rates than some shorter-duration ones right now, which signifies that the market expects rates to come down in the future. And since you don't know what that will look like exactly, you might prefer to get a guaranteed return for a set period.
3. Provides relatively low-risk income
While CDs might not offer as high returns as other assets like stocks and bonds, they tend to provide a relatively low-risk income source. You can protect your principal investment while still earning returns. And you can gain federal insurance on these deposits that will protect you if your bank collapses, though you'll want to confirm you're buying an eligible CD.
Even relatively safe assets like Treasury bonds, for example, might have more risk than CDs in the sense that if you need to sell before maturity, you might face losses, depending on market conditions. Or, with I bonds, for instance, there's a minimum 12-month holding period.
4. Can help automate savings
Another potentially beneficial feature of CDs is that they often have an automatic renewal feature.
While you still probably want to confirm that you want to renew your CD for another term as it nears maturity—in case another investment option makes more sense for you at that time—being able to automatically roll your funds from one CD into another can make it easier to continue saving.
In contrast, if you sold stocks, for example, you might have to manually choose a new place to put those funds if you want to optimize earnings.
Explore your CD options online now or use the table below to see how much more you could be earning.
The bottom line
Overall, CDs can be an attractive place to store money for people looking to earn a little bit of money without taking on huge risks. Keep in mind that CD interest is generally taxable, like other forms of bank interest, but if you can earn a higher yield in a CD than you could in some other accounts, it could be worth it. Particularly in the current environment of recent interest rate hikes, CDs might be more attractive to you now than they've been in the past, so it could be worth looking into.
