If you've ever considered putting money in a CD, now is probably the right time to do it
Certificates of deposit are a type of savings account with a fixed interest rate and minimal risk. They're popular when interest rates are high.
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- A certificate of deposit is a type of savings account with a fixed interest rate and term.
- Once you deposit money into a CD, it typically can't be accessed early without paying a penalty.
- For people considering putting money into CDs, now is a good time; CDs have high interest rates.
Experts say the best place to save money is somewhere it can earn interest. While the stock market often provides the best return on your money, it's not a savings account. Money invested isn't easily accessible, and there's a chance you will lose it.
Putting your money in a high-yield savings account, certificate of deposit, or money market account can put hundreds of extra dollars in your pocket in the long run. Your money will also be secure because it's in an FDIC-insured bank account. Up to $250,000 per depositor, per category, is covered by FDIC insurance.
Since 2022, the Federal Reserve has raised the federal funds rate several times in order to combat inflation. As a result, interest rates on online savings accounts have gone up, as well.
The highest-earning CDs are offering over 5% APY. Uncertainty about future rate hikes has increased the appeal of CDs for some savers. Here's how to decide if CDs may be a good option for your right now.
Are CDs a good investment?
CDs are a type savings account, and aren't typically considered investments. CDs are a low-risk place to keep your money and pay lower returns in comparison to investing in the stock market.
If you expect rates to fall, locking in a high rate through a long-term CD now would be worth it. Or if you expect rates to rise later this year, you could park your money in a short-term CD to take advantage of today's rates while maintaining the freedom to trade up if rates increase.
"This can be a good option for someone looking to park their cash for a short period of time and earn more than a general savings account," Anjali Jariwala, a CFP and CPA at Fit Advisors, tells Insider. "The nice part about a CD is there is no downside risk like you would experience with investing in the stock market."
Jariwala added, "The main trade-off with a CD is liquidity — you are tying up your money for a specified period of time."
A CD is a type of savings account with a fixed interest rate and terms that typically range from three months to five years. When money is deposited in a CD, you lock in an interest rate that lasts through the term length — generally, the longer the term, the higher the interest rate.
What to know about CDs
Most CDs require a minimum deposit, from $1 to $25,000 or more. At current interest rates — assuming they don't change — a $10,000 deposit in a 1-year CD earning 5% APY would earn around $500. Interest earnings on the account are taxed as ordinary income.
Taking money out of a CD before the end of the term will usually incur an early withdrawal penalty. Financial institutions will usually penalize you by having you pay back some of the interest you've earned. Therefore, many banks tend to charge more on longer terms since you've accumulated more interest over time.
Because of these limitations, a CD may be a good place to store savings needed by a specific date and not before then, Jariwala says, like money for a down payment or a home improvement project. If you're worried about losing access to your money for a few months or years, a CD may not be the best option for you; a high-yield savings account is often the best place for an emergency fund.
CD strategies
Some people use CDs as part of a larger savings strategy to optimize fixed interest rates and different term lengths.
"I have a few clients where we are implementing a 'CD ladder' strategy as a component of their fixed-income portfolio," Jariwala says. "The CD ladder is broken up into four tranches: three, six, nine, and 12 months. As CDs become due, the money is reinvested into another similar-term CD. If interest rates are rising, the goal is that you can pick up that higher-earning CD when your current CD matures."