Should I open a CD right now?

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The average savings account interest rate is 0.57%, but you can easily find a higher return, through a certificate of deposit (CD).

But there’s a catch. In exchange for these higher rates, you give up the opportunity to access your money for months or years at a time.

While CDs can be a good fit for many people, they aren’t right for every situation. It’s important to familiarize yourself with how they work. Here’s what you should know.

How CDs work

When you open a CD, you deposit a set amount of money into an account for a specific term. Terms range anywhere from six months to many years. You agree to not withdraw your money during that time, in exchange for competitive interest rates.

At the end of the term, you can withdraw your initial deposit along with the accumulated interest.

You'll have to pay a penalty if you withdraw your money before the term ends.

CDs are a solid, low-risk choice for those looking to earn more on their savings with a guaranteed return.

What type of CD is right for you?

There are many types of CDs available, each with different features. These include:

• High-yield CDs: These CDs, often offered by online banks, provide much higher interest rates than other types of CDs or savings accounts.
• Jumbo CDs: These CDs require a high initial deposit, often around $100,000. Because of this, they usually pay higher interest rates than typical CDs.
• Flexible CDs: These CDs allow you to add or withdraw money from the account on a limited basis.
• Bump-up CDs: In a rising interest rate environment, these CDs let you increase your interest rate. Rates start slightly lower than a traditional CD, and you can only choose to increase the rate one or two times during the CD’s term.
• No-penalty CDs: You can make an early withdrawal from a no-penalty CD without paying any fees. Rates on these CDs are often lower than traditional CDs.
• Add-on CD: With an add-on CD, you can make extra deposits during the CD’s term, but cannot make withdrawals.

CD Laddering

CD laddering allows you to balance the advantages of higher interest rates offered by CDs with the ability to access your money.

To create a CD ladder, you'd divide your money into multiple CDs with staggered maturity dates. This provides liquidity while letting you earn higher interest rates on longer-term CDs.

For example, if you have $4,000 to save, you could put $1,000 each into a 3-month, 6-month, 9-month, and 1-year CD. Every 3 months, one CD will mature, and you can access the $1,000 you deposited. If you don’t need the money, you can then roll the CD into a new CD with a 1-year term.

Should I open a CD right now?

It’s important to think carefully before opening a CD. Consider if you can realistically leave your money in the CD for the entire term.

“The bonus to CDs is that you lock in your interest rate. The downside to CDs is that you lock in your money,” says Jay Zigmont, certified financial planner and founder of Childfree Wealth. “It is a trade-off between return and flexibility.”

CD interest rates are often higher than other savings accounts. Plus, unlike high-yield accounts, a CD has a fixed interest rate. That means that if rates fall, the CD will continue earning at the same rate. It also means the CD’s rate won’t rise if market rates increase.

Like other bank accounts, CDs are insured by the Federal Deposit Insurance Corporation (FDIC). That means your money is protected in a way that it wouldn’t be if you invested in stocks or bonds.

The major trade-off is a loss of flexibility. You’ll pay penalties if you want to make an early withdrawal, eliminating the benefit of the higher interest rate. Plus, if rates rise, you’ll have to watch your savings sit in a CD earning a lower interest rate.

When opening a CD makes sense 

There are a few scenarios where opening a CD can make sense.

You’re saving for a specific, short-term goal

Opening a CD is often a good idea if you’re saving up for a specific goal. For example, if you know you want to buy a car in two years, opening a two-year CD can be a good way to build your savings and keep that money safe. On the other hand, if you think you’ll need access to that money in the near term, a CD isn’t a good idea.

A CD is a good way to keep that money locked away and reduce the temptation to spend it on something else.

You think interest rates will fall 

If you think interest rates may decline in the future, opening a CD could be a good move. This is because CDs offer a fixed interest rate for the duration of the term, protecting your savings from potential rate reductions.

By locking in a higher rate now, you can secure a more favorable return than other savings accounts that may be impacted by declining rates.

When opening a CD doesn’t make sense 

There are times when you’re better off putting your savings somewhere else.

You’re saving for a long-term goal

If you’re saving for a long-term goal — one that’s more than five or ten years into the future — opening a CD likely isn’t the best choice.

The average CD offers an interest rate of 1.72%. Today’s top CDs have rates that are slightly above 5%.

While that may sound pretty good, compare that to the average return of 13.8% that you can get from investing in stocks. While stock values can fluctuate, you can expect a return close to that number over the long term. If you can handle the volatility of the market, you’re likely to come out ahead by investing in the market, rather than opening a CD.

Imagine you have $10,000 you want to set aside for a down payment on a home and plan to buy in 15 years. If you put that money in a CD paying 5%, you’d wind up with $20,789.28. If you invested in stocks and earned the average 13.8% annual return, you’d have $69,523.87.

You have a limited emergency fund

Opening a CD means giving up flexibility. If the unexpected happens and you need access to your money before the CD’s term ends, you’ll have to pay a fee.

Emergency funds should be easily accessible in case of unexpected expenses. Storing your emergency savings in a more liquid account like a traditional savings or money market account offers easier and penalty-free access to your funds when needed.

Make sure you have adequate savings before opening a CD. A good rule of thumb is to have at least three months’ worth of expenses available.

Rates aren’t competitive

A big draw of CDs is the competitive interest rates. But if you can find the same rates elsewhere (especially in more liquid accounts), opening a CD likely isn’t worth it.

Many of today’s top high-yield savings accounts offer similar (or even higher) interest rates without the limitations of a CD.

Even if a CD offers a small difference in return, you may decide the flexibility is worth more than the higher interest rate.

Will CD rates continue to go up?

Opening a CD just before rates rise can be painful. You lock in your money at a lower interest rate and then decide between living with the lower rate or paying an early withdrawal penalty.

CD rates are influenced by the federal funds rate, or the interest rate banks charge each other for borrowing. Changes to this rate can impact CD rates. Factors like economic optimism, increased borrowing, and inflation can drive rates up. Reduced demand during economic downturns can push rates down.

While it’s hard to know exactly if CD rates will rise or not, it’s important to look at your own financial situation to decide if a CD is right for you.

“Right now I'm advising my clients to keep their money in a high-yield savings account rather than a CD if there is any chance they will need the money before the end of the CD period,” says Zigmont. “CDs are a good place to keep cash when you know when you will need the money and just want to keep it safe.”

The bottom line

Deciding whether to open a CD right now depends on your individual financial goals, risk tolerance, and market conditions. It's important to consider factors such as current CD rates, your timeline, and potential liquidity needs.

Editorial Disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.