3-Month CD Rates Are Up 5,300% in 2 Years. Should You Invest Now?

What's a tenth of a percentage and can span a distance between Point B and E?

A CD -- from, like, July 2021.

Indeed, it's pretty wild to see how high CD rates have climbed since July 2021. Between a 0.10% yield from July 2021 and a 5.44% yield in July 2023, 3-month CD rates have climbed 5,300%. The last time CD rates were this high, it was 2006. That was before the iPhone was released and before Elon Musk took over at Tesla. And if you're not feeling old yet, that was also the same year Twitter debuted.

So with some rates climbing north of 6%, is now the best time to invest in today's top-paying CDs? Let's take a closer look.

Why you might want to invest in a CD

CDs have fixed interest rates and can offer you something few investments can: predictable income. Even if you prefer investments with more growth potential, like stocks, CDs can diversify your portfolio by guaranteeing a portion of your money is safe, intact, and growing steadily.

A short-term CD, like a 3-month or 6-month CD, can be especially useful to hedge market volatility. If you've been getting queasy lately from the market's ups and downs, locking money up for three to six months might give you time to find some grounding, re-strategize, and see where the market is heading as we approach the new year.

Plus, today's rates won't be high forever. While it's unlikely CD rates will decline before 2023 is over, next year might be different. Locking into rates on long-term CDs, like a 5-year term, means you can continue to get great returns, even if the Federal Reserve starts lowering its federal funds rate in the near term.

Why you might not want to invest in a 3-month CD

You might say this is a once in a quarter-lifetime opportunity to invest in a high CD rate. I wouldn't argue against that. But the question of "should you?" requires a bit more brooding than just a high APY.

If you're investing for the long term, I'd say examine your opportunities broadly first. Even if a 6% rate is good for a savings account, it's pretty mediocre in comparison to some stocks, ETFs, and mutual funds. For perspective, the S&P 500 index is still up about 13.5% year to date. This rate isn't fixed and will fluctuate. But the long-term annualized rate of return on the same index -- about 9.7% over the last 95 years -- is still higher than today's top-paying CDs.

I'd also take into account your own financial situation. It's one thing if you have ample savings on hand and can build out a long CD ladder. But if you only have, say, three months' worth of living expenses in your savings account, I don't think a CD is worth it, unless it doesn't charge a penalty. Most banks and credit unions, however, will impose an early withdrawal penalty and can make it difficult for you to access cash in an emergency.

That said, a CD could mean earning more in a shorter period. CDs have few risks -- other than penalties for withdrawing early -- and might even discourage you from spending money. Assess the risks for yourself, but if you're sure a CD is right for you, don't hesitate to lock in today's great rates.