Is 5% interest on a CD good?

It's generally a good idea to save money for the future. However, it's also important that you earn a return that's at least equal to the current inflation rate. If you don't, your money will lose buying power as it sits. That's the problem with storing money in a traditional savings account. This savings vehicle offers little to no interest on your savings. So, the dollar you save now will likely be less valuable when you use it in the future. 

One way to earn a meaningful return on your idle cash is to open a certificate of deposit (CD). Although not all CDs beat inflation, the best options are offering returns well above the current inflation rate. So, what if you come across a CD with a 5% interest rate. Is that good or could you find a higher alternative?

Compare the highest-paying CDs available now. 

Is 5% interest on a CD good?

There are two primary factors that determine the rate you'll get on your CD. Those include: 

1. The financial institution you use: Financial institutions have the ability to decide how much money they'll pay you for essentially borrowing your money. In fact, this is one way that banks compete with each other. So, be sure to compare your options before you open a CD. 
2. The term of the CD: Typically, the longer your CDs term, the higher you can expect your interest rate to be. However, that's not always the case. In fact, in today's high-interest environment, six-month and one-year CDs often pay higher rates than their three and five-year counterparts. So, it's important to consider the term of your CD and how that term will impact your returns. 

With that in mind, the best one-year and six-month CDs on the market currently offer over 5% annual returns. However, you'll be hard-pressed to find a three or five-year CD that pays 5%. Nonetheless, in general, a 5% return on a CD is a good return. 

Why it's a good idea to open a CD now

If you're thinking about opening a CD, you're likely making a wise financial decision. After all, there are a few good reasons to open one of these deposit accounts as soon as possible. 

CDs are offering impressive returns

As mentioned above, the best 6-month and 1-year CDs are currently paying over 5% returns. Moreover, the best long-term CD returns are well over 4%. So, what does that mean in terms of dollars and cents? Say you invested $25,000 into a CD, you would earn $1,250 in interest for a total of $26,250 by the end of the one-year term (at the 5% rate). 

Open a CD now to lock in today's high rates. 

You can lock your returns in

"CDs generate interest so that you can earn steady growth," explains Arthur Viana, senior vice president and retail market manager at Rockland Trust Bank. "Their fixed rates mean you will earn more over the specified period of time than you would in a regular savings account. A CD is also beneficial for someone who has cash they can leave untouched for longer periods of time because it will grow their investment."

That's important because we're in the midst of a high interest rate environment, but interest rates are cyclical. That means the economy experiences periods of high interest rates, periods of low interest rates and transitional periods between the two.

Considering recent economic data, there's a strong argument that the high interest rate environment of today will end soon and a transitional period will start, driving interest rates lower. The good news is that when you open a CD, you lock in the current interest rate on the account for the entire term of the account. So, if you open a 5-year CD with a 4.5% interest rate today, you can rest assured that even if interest rates do drop ahead, you'll earn 4.5% for the entire life of your account. 

CDs are safe

CDs are typically safe savings vehicles for a couple of reasons: 

1. FDIC or NCUA insurance: "CDs are federally insured by the FDIC which makes them a solid low-risk option for someone who is more risk-averse," says Viana. However, it's important to note that if you open your CD with a credit union, you'll typically be covered by NCUA insurance rather than FDIC insurance. 
2. No ties to market or economic conditions: Once you open your CD, you're guaranteed a set rate of return regardless of the state of the market or the economy.   

CDs can help you meet savings goals

"Saving in a CD can help you match a short-term savings goal," explains Michael Arvay, founder and CEO of Marvelous Retirement Planners in Toledo, Ohio. "Saving in a CD allows you to put your 'lazy' money to work" as you save for a specific cause." 

That makes sense. After all, you'll typically pay a penalty if you access your CD early. So, you'll be less likely to want to tap into your money before you need it for your planned expense. 

Use a CD to help you achieve your savings goals today. 

The bottom line

The top CDs are currently paying around 5% depending on the term of the account. So, if you open one with a 5% interest rate, you can rest assured that you're among the top earners in these savings vehicles. However, today's high rates won't last forever. So, if you're earning under 5% on your idle cash, it may be wise to lock in a higher rate with a CD today while you still can.