One Underrated Reason to Invest in CDs

If it seems as if everyone you know is putting money into CDs these days, there's a reason for it. CD rates are the highest they've been in years. But they may not stay that way for much longer.

CDs are paying so generously right now because the Federal Reserve spent much of 2022 and 2023 raising interest rates to help slow the pace of inflation. But the Fed is expected to start cutting interest rates at some point in 2024. And while that may not happen until the second half of the year, the point is that the CD rates you're seeing right now aren't going to stick around forever.

Now you may be aware that CDs tend to offer higher rates than regular savings accounts. Also, with a CD, your interest rate is guaranteed -- whereas your savings account's interest rate could fall at any time with market conditions.

But these aren't the only benefits of opening a CD. There's a lesser-known reason why putting money into a CD could be your ticket to meeting your next savings goal.

When you feel forced to keep your money in the bank

There's a reason CDs pay more than savings accounts -- you're committing to keeping your money where it is for a preset period. And if you withdraw your CD before its maturity date, there can be a costly penalty involved, the extent of which will depend on your bank. Capital One, as an example, charges a penalty of three months of interest for an early withdrawal on CD terms of 12 months or less.

That penalty, however, could work to your benefit. That may seem counterintuitive, but here's the logic.

With a regular savings account, there's no penalty for raiding your funds. So if you're tempted by an impulse purchase, you may be inclined to take your money out. With a CD, you may be a lot less inclined to remove your money ahead of schedule knowing your bank is going to take some of it away in penalty form.

To put it another way, the way CDs work may be just the thing to keep you from straying from your savings goals. There's just a lot more mental and financial pressure to leave a CD alone than there is for a savings account. And that might work to your benefit.

A CD ladder is also a good idea

The more restrictive nature of CDs could make it possible to meet your savings targets. But it's also not necessarily a great idea to put all of your money into a single CD. You never know when you might need access to cash sooner than expected.

First, figure out how much money you need to cover three full months of essential bills and leave that sum in a regular savings account you can access penalty-free at any time. From there, you may want to take your remaining funds and set up a CD ladder. This effectively has you opening different CDs with varying maturity dates, allowing your funds to free up regularly during the year, giving you a bit more flexibility to use the money or open another CD.

The benefits of CDs are pretty clear -- higher interest on your money, and the guarantee of your rate for a period. But you may want to consider this underrated perk of CDs when deciding where to put your money.