Why you should open a CD before inflation drops
After months of showing that inflation was cooling, it actually ticked up again in July and rose yet again in August. The effects of inflation have rippled across the country and the globe as interest rates meant to combat it have increased exponentially. The benchmark interest rate currently sits at a range between 5.25 and 5.50%. That's the highest it's been in 22 years. As a result, borrowing costs for everything from mortgages to credit cards have jumped exponentially.
There has been one silver lining, however, and it's not an insignificant one. The interest rates on savings vehicles, like high-yield savings and certificates of deposit (CD) accounts, have also rocketed upward, with rates on the former close to 5% and on the latter closer to 6%. This has dramatically raised the appeal of both accounts, especially for CDs. But the timing to maximize this earning potential could be closing.
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Why you should open a CD before inflation drops
No one knows for sure when inflation will drop, or how much longer it will take for the Federal Reserve to get to their targeted 2% inflation rate goal. But considering that the Fed paused rate hikes in June, and again earlier today, it's likely that the window to secure a top-earning CD is closing. After all, a pause in rate hikes is typically a prerequisite for an eventual drop down the line. And when those rates fall, CD interest rates will fall with them.
But if you open a CD now, you can take advantage of today's rate environment, regardless of what happens in the months and years to come. That's because CD interest rates are locked, so you'll earn interest at the rate you opened the account with for the CD's full term, even if rates drop during that time frame. For example, if you open a short-term CD with an online bank today at a 5.5% rate — and the prevailing rate drops to 4.5% by the end of 2023 — you'll still have made money at that higher rate until the CD expires.
And if you're concerned that locking in a rate today could prevent you from securing a potentially higher one in the future, don't be. You can easily "ladder" your CDs to prevent this exact scenario. By doing so, you'll have a series of CDs expiring at different times, thus always having some money invested and some money available to re-invest into a higher-interest earning account (assuming these rates are still elevated in the future).
One thing you shouldn't do (besides waiting for inflation to drop to open a CD) is keep your money in a regular savings account. Interest rates on these accounts are a minimal 0.45% currently, meaning you're losing money by keeping it there versus putting some into a CD or high-yield account instead.
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Don't discount high-yield savings accounts
While CDs have multiple benefits now, don't discount high-yield savings accounts, either. These operate just like regular savings accounts do, albeit with a higher interest rate. Plus, you'll maintain the access you have with your regular account (something you won't get by locking your funds away in a CD).
While not as high as the very best CD accounts, high-yield accounts are also a great way to take advantage of today's inflated interest rates. Learn more about your high-yield savings account options here.
The bottom line
Inflation has had negative effects for tens of millions of people. But with few silver linings, it's important to take advantage where possible. One of the best ways is to open a CD account now and start earning a much greater rate on your money. High-yield savings accounts are also beneficial. Just don't leave your money untouched in a regular savings account. The interest you're earning there is minimal and unlikely to help at all with the rising costs that inflation has generated.
