This Is The Only Reason I Might Buy a CD Right Now
KEY POINTS
- I've never been a big fan of CDs because I don't want to tie up my money
- CDs may be worth buying now because the yields are high and they may not last long.
- Other investments, like high-yield savings accounts, could soon see declining rates.
CDs are an investment product that I have never been interested in. There are some big downsides to them, and the returns they offer generally haven't been very impressive.
But right now, I'm actually considering putting some money into one. And there's one key reason why I may have changed my mind about whether a CD makes sense for me.
CDs could be a great option now for this big reason
After steering clear of CDs for my entire adult life, I'm thinking seriously about buying one now because I want a bank to commit to paying me today's high yields for at least a few years.
Currently, interest rates on both CDs and savings accounts are really high. I could buy an Ally High Yield CD or a Capital One 360 CD today that locks in my rate for five years at 3.90%. Or, I could instead put my money into a high-yield savings account, like the SoFi Checking and Savings account (member FDIC). This account is currently paying up to 4.60%² annual percentage yield. That would give me a better rate than a 5-year CD would.
Our Picks for the Best High-Yield Savings Accounts of 2024
American Express® High Yield Savings
APY
4.25%
Rate info
4.25% annual percentage yield as of July 19, 2024
Min. to earn
$1
Open Account for American Express® High Yield Savings
On American Express's Secure Website. |
APY
4.25%
Rate info
4.25% annual percentage yield as of July 19, 2024
|
Min. to earn
$1
|
Citizens Access® Savings
APY
4.50%
Min. to earn
$0.01
Open Account for Citizens Access® Savings
On Citizens' Secure Website. |
APY
4.50%
|
Min. to earn
$0.01
|
Bask Interest Savings
APY
5.10%
Min. to earn
$0
Open Account for Bask Interest Savings
On Bask Bank's Secure Website. |
APY
5.10%
|
Min. to earn
$0
|
But like pretty much all savings accounts, SoFi's rate is variable. It's great right now. It probably will stay great for at least the next few months and possibly into 2025. But, the Federal Reserve has made it very clear it is hoping to cut interest rates either this year or next once inflation gets under control.
When the Fed cuts rates, the great savings account yields on offer today are going to disappear. The ability to buy new CDs at such a competitive rate is also going to be lost. But if I have a 5-year CD, my rate will be locked in. As everyone else without a CD sees their return on investment (ROI) decline on their savings, I'll get to keep earning a great rate for the full 5-year CD term.
I don't want to miss the chance to ensure a really competitive yield when CD rates (and savings account rates) may not reach these current levels again for potentially decades once they go down.
Should you buy a CD right now?
Now, one reason I've always hesitated to buy a CD is because there is a downside to these accounts. You have to leave your money in place for the duration of the term or else you face being penalized with an early withdrawal fee. And that downside remains right now.
If you cannot commit absolutely to leaving your money invested until the CD matures, you don't want to buy a CD -- even though rates are great right now. It's not worth the penalties.
However, since interest rates are so high right now, and most likely not going to stay at this level, you aren't taking on a huge amount of interest rate risk by buying a 5-year CD -- unlike when yields were lower.
Ultimately, you'll need to decide if you think rates are at their peak and you'll need to be sure a CD makes sense given your timeline for your funds. But the fact you can lock in a really competitive yield for half a decade when it's almost inevitable rates are going to fall relatively soon does make CDs worth at least considering.
These savings accounts are FDIC insured and could earn you 14x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 14x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
SoFi disclosure:
² SoFi members with Direct Deposit or $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. Members without either Direct Deposit or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
Related Articles
View All Articles