3 big benefits of opening a 5-year CD right now
It can be challenging to find secure and rewarding investment options that keep pace with inflation. After all, the average regular savings account rate was 0.53% as of July 24, 2023, which simply can't cut it. In turn, the potential gains from a fluctuating stock market and other high-risk, high-reward ventures can be tempting — but there's real risk associated with these types of investments.
On the other hand, there's something to be said about the stability and predictability of safer investments, like certificates of deposit (CD). And while interest rates on CD accounts were much lower just a few years ago, the Federal Reserve's interest rate hikes over the last year have resulted in much higher APYs on CD accounts. Even short-term CDs are offering attractive rates right now, and if you opt for a longer term — like a 5-year CD — right now, there may be even more benefits.
In today's economic climate, opening a 5-year CD stands out as an attractive option for anyone who's seeking to grow their savings safely while guaranteeing returns on their money. But if you're not sure it's the right move for you, consider these big benefits of opening a 5-year CD right now.
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APYs are higher than normal
Interest rates are higher than normal right now, which isn't great for borrowers. However, the current interest rate environment can offer big benefits for savers who want to earn big returns on their money. By committing your funds to a CD account for an extended period, like five years or more, financial institutions typically reward you with higher interest rates, which can lead to significant earnings over time.
While the regular savings account rate averages about 0.42% currently, there are numerous long-term CDs — including 5-year CDs — offering annual percentage yields (APYs) above 4.5% as of July 31, 2023. And, with a little research, it's possible to find CDs offering interest rates that are even higher. By locking in a 5-year CD now, you have the opportunity to earn a more attractive interest rate compared to short-term CDs or savings accounts.
You'll be protected from interest rate fluctuations
One of the primary advantages of a 5-year CD is the fixed interest rate it offers. Rather than having to plan for fluctuations in savings account rates or the unpredictability of the stock market, a 5-year CD locks in a specific interest rate for the entire duration of the term.
What this means is that you will continue to earn the same rate of interest, regardless of any fluctuations in the economy or interest rate changes, during the CD's lifespan. This stability allows you to plan and budget with confidence while ensuring that your money is earning at a higher-than-average APY.
The investment risks are minimal
Unlike stocks or other investment vehicles, CDs are considered low-risk investments. The stock market can be highly volatile, subject to unpredictable swings that can cause anxiety for investors. That's something investors have experienced recently, and it's tough to predict where the market will go. But a 5-year CD allows you to distance yourself from market volatility and focus on long-term growth without being influenced by short-term market fluctuations.
When you lock your money into a CD, it's also insured by the Federal Deposit Insurance Corporation (FDIC) or an equivalent entity, up to a certain amount (typically $250,000 per account holder). This insurance ensures that even if the bank faces financial difficulties — which we saw with the string of bank failures earlier this year — your principal investment is protected while earning steady returns.
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The bottom line
Opening a 5-year CD right now comes with a host of benefits, making it an attractive option for risk-averse investors seeking stability, security and predictable returns. With a fixed interest rate, FDIC insurance, and shielding from market volatility, a 5-year CD can serve as a valuable addition to a well-rounded investment portfolio. Whether you have specific financial goals or simply wish to grow your savings with peace of mind, it may benefit you to explore the potential benefits of a 5-year CD today.
