Are CDs a Better Bet Now That Interest Rates Are Rising?
KEY POINTS
- CD rates are rising now that the Federal Reserve is hiking up interest rates.
- While you may be tempted to open a CD, there may be a better home for your money.
CDs may be paying more than they did last year, but that doesn't mean they're the right place for your money.
The Federal Reserve has been raising interest rates this year in an effort to slow the pace of inflation. That's making borrowing more expensive across the board. But it's also making it so that banks are paying savers more generously.
If you take a look at your savings account today, you may notice that the interest rate you're getting on your money is higher than what you were getting earlier on in the year. Similarly, certificates of deposit, or CDs, are now paying more interest, so if you have money you don't need immediately, you may be inclined to open one.
But are CDs really such a good bet right now? Here's why they may -- and may not -- be.
The upside of opening a CD
When you put money into a CD, your principal is protected. Deposit $5,000 into a one-year CD and leave that money alone for 12 months, and after a year, you're guaranteed to get your $5,000 back, plus interest. Plus, CDs commonly pay more interest than savings accounts, so if you're going to keep money in the bank, it could pay to put it somewhere it will earn more.
The downside of opening a CD
With a CD, you commit to keeping your money locked up for a preset period of time. Cashing out a CD early means losing money -- usually, a few months' worth of interest -- as a penalty, whereas with a regular savings account, you can take a penalty-free withdrawal at any time.
Similarly, when you put money into a brokerage account, that money isn't restricted. You have the option to cash out investments at any time without penalty. Just as importantly, with a brokerage account, you might earn a much higher return on your money than what a CD will pay you -- even with today's CD rates being higher.
Where should you put your money?
If you're not sure if a CD is right for you, ask yourself some questions:
- Is this money I expect to need within five years? If so, a CD may be a better bet than a brokerage account, because your principal is protected. If you have cash earmarked for a shorter-term goal, like buying a house, then you may want to avoid investing it.
- Am I comfortable with the idea of investing? For some people, investing money means losing sleep at night. If that sounds like you, you may want to stick to a CD for now and take some time to grow your investing knowledge.
- Do I have a full emergency fund? Some people will tell you a CD is a fine place to put your emergency savings. In reality, you should really stick to a regular savings account, because if an emergency strikes and you need to access that money, you don't want to have to deal with penalties.
Although CDs are now a more attractive bet in light of higher interest rates, they may not be the best place to keep your money. Make sure to walk through different options before tying your cash up in a CD -- especially a longer-term one.
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