5-year CD pros and cons every saver should know
Certificate of deposit (CD) APYs are higher than they've been in decades, making these secure savings vehicles hard to ignore. One popular CD term is a five-year term. These CDs offer compelling returns alongside minimal risk when compared to other investment options.
Although these high-return accounts are the perfect option for some, there's no such thing as a one-size-fits-all savings or investment vehicle. As with any savings vehicle, it's important to consider the pros and cons before you open a 5-year CD.
Open a CD now to lock in today's historically high rates.
5-year CD pros and cons you should consider
"CDs are basically amped-up savings accounts with a time deposit component," says Lamar Brabham, CEO and founder of Noel Taylor Agency in North Myrtle Beach, SC. "They are easy to open and available almost everywhere, with rates commonly more than 5%."
There are plenty of reasons to consider opening a 5-year CD, especially considering today's high rates, but there are also drawbacks to consider. Here are a few to take into consideration before opening an account:
5-year CD pros
- Lock in impressive guaranteed returns: CDs are currently paying higher returns than they have in years. That's great news for the saver "in today's high interest rate environment," says Lamar. High interest rates mean these savings vehicles "will provide respectable returns."
- Enjoy the safety of FDIC-insured accounts: "Because CDs are FDIC-insured, they do provide safety," says Lamar. After all, if the bank you open your CD with can't afford to pay you back as agreed, FDIC insurance will step in to cover the difference.
- Don't pay maintenance fees: Other savings vehicles like traditional savings accounts typically come with monthly maintenance fees. These fees cut into the return your idle money generates. CDs don't generally come with monthly maintenance fees. So, you get to hold onto more of your earnings.
Open a 5-year CD to lock in respectable returns with no maintenance fees.
5-year CD cons
- They lack accessibility: When you open a 5-year CD, you're making a 5-year commitment. So, it's not wise to open a 5-year CD with money from your emergency fund. Those funds should be kept where they are liquid and accessible.
- They come with interest rate risk: Although CDs are a safe investment vehicle, they're not completely risk-free. One risk you'll face when you open a 5-year CD is interest rate risk. This is the risk that interest rates will rise while your money is locked up in your current account. If that happens, you won't have the liquid funds available to take advantage of new, higher interest rates. So, the difference between what you could have earned and what you are earning becomes an opportunity-based loss.
- They come with inflation risk: There is also an inflation risk that comes with 5-year CDs. That is, you stand the risk that the inflation rate rises above your returns. However, that risk is minimal considering the current environment.
Open a CD now to take get more for your savings.
The bottom line
Although CDs aren't the perfect investment vehicle for everyone, they are a wise investment vehicle for many. Considering the current interest rate and inflationary environment, the potential returns on a five-year CD are hard to ignore. Moreover, inflation and interest rate risks are relatively minimal when compared to conditions just a couple of years ago.
