Is Now a Good Time to Invest in Certificates of Deposit?

Recent bank failures and rising interest rates have left a lot of people uncertain about the best home for their money right now. It's not just a question of which bank you want holding onto your funds. You also have to think about which type of account you want to keep your money in. 

Certificates of deposit (CDs) are one option for those hoping to earn a high interest rate on their savings. But they may not be the best choice for everyone. Below, we'll look at what you need to weigh to decide if one of these accounts is right for you.

How CDs work

If you're not familiar with CDs, they're a type of deposit account that enables you to earn an above-average interest rate on your money in exchange for limited access. When you put cash into a CD, you're agreeing not to touch it for a length of time known as the CD term. This can be anywhere from a few weeks to five years or more, depending on the CD you choose.

You typically can't add money to the CD over time and you'll pay a penalty in lost interest if you withdraw CD funds before the term is up. So these accounts are usually only a good idea if you know you won't need the money for a while.

CDs are FDIC-insured, just like checking and savings accounts, so your money is protected even if your bank fails. CDs offered through credit unions, which are often referred to as share certificates, are protected by National Credit Union Administration (NCUA) insurance. This is similar to FDIC insurance but it applies to credit unions.

Are short- or long-term CDs a better choice right now?

As a general rule, long-term CDs typically pay a higher interest rate than short-term CDs, though this can vary by bank. Some banks offer special rates on some of their short-term CDs in an effort to attract new customers but don't offer especially competitive rates on long-term CDs.

When choosing a CD term, you have to think about how long you're comfortable locking your money up. But you also need to consider what interest rates are doing right now.

Typically, you want to avoid long-term CDs when interest rates are rising. If you lock yourself in for, say, five years, and rates rise after a year, you'll be stuck earning that low rate for the remaining four years. You won't be able to get your money out to put it in a higher-earning CD or an online savings account without incurring a penalty.

On the other hand, when interest rates are falling, long-term CDs can be a smart investment. You'll guarantee yourself a high interest rate for the full length of the CD term while you might not earn very much with a savings account during that same period.

The Fed just raised interest rates again on March 22, 2023 in an effort to curb inflation. Inflation is now beginning to slow down, so there may not be any further rate hikes, but you may want to avoid locking up your savings for years just to be safe. Stick to shorter-term CDs right now or keep your money in a high-yield savings account where you can access it at any time.

How to open a CD

Many banks and credit unions offer CDs, so there are a lot of options to choose from. Since you can't easily access your funds during the CD term, interest rate is the biggest draw for these types of accounts.

Think about which term length you're comfortable with and then compare options to see which bank offers the best rates for that term. You should also watch out for minimum deposit requirements. Some banks may not have them while others can require $1,000 or more. This could prevent you from opening some CDs if you don't have a lot to deposit.

Once you've chosen the account you like, the process is pretty much the same as opening any other bank account. You can apply online or in person if the bank you choose has branches nearby. You'll need to provide some personal information, including your birthdate and Social Security number. And you'll need money to fund your account in some way. Check with your bank to see what options you have for funding your account.

There's not much for you to do once the CD is open. Your bank should notify you when the term is up so you can decide what to do next. Some automatically roll your funds over into a new CD with a similar term, but this usually isn't a good idea. If you don't plan to spend the money, shop around for a better CD when your initial term ends based on the criteria discussed above.