Certificates of deposit have the highest interest rates among bank accounts, with the best rates currently reaching 3% and above. Current rates are among the highest they've been in a decade. When the Federal Reserve raises its rate, as it has multiple times in 2022, banks usually raise their savings and CD yields.
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Certificates of deposit have the highest interest rates among bank accounts, with the best rates currently reaching 3% and above. Current rates are among the highest they’ve been in a decade. When the Federal Reserve raises its rate, as it has multiple times in 2022, banks usually raise their savings and CD yields.
Since CDs have fixed rates, you may wonder if you should wait for even higher rates before locking in. So when should you open a CD? The answer is it mostly depends on your short-term savings goals. Here’s an overview of CDs’ pros, cons and when they can be a good fit for you.
» SEE the best CD rates
Pros to investing in CDs
1. CDs are safe investments. Like other bank accounts, CDs have federal deposit insurance for up to $250,000 (or $500,000 in a joint account for two people). There’s no risk of losing money with a CD, except if you withdraw early.
2. CDs have fixed rates and predictable returns. Once you open a CD, you lock in a rate. This lets you know exactly how much money you’ll earn over your CD term, whether that’s months or years. In contrast, banks and credit unions can change rates on regular savings accounts at will.
» Learn more: When and why you should open a CD
3. CDs provide a variety of terms that can offer structure to savings goals. CD terms typically range from three months to five years, so they can be tools to set aside some of your savings for future purchases within that time period. In general, the longer the term, the higher the CD rate. And the shorter the term, the more frequent your opportunities to withdraw or renew a CD.
Savings Cash Management CD Checking Money Market A savings account is a place where you can store money securely while earning interest. A savings account is a place where you can store money securely while earning interest. Learn More Member FDIC SoFi Checking and Savings APY 3.50% SoFi members with direct deposit can earn up to 3.50% annual percentage yield (APY) on savings balances (including Vaults) and 2.50% APY on checking balances. There is no minimum direct deposit amount required to qualify for the 3.50% APY for savings and 2.50% APY for checking balances. Members without direct deposit will earn 1.20% APY on all account balances in checking and savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 12/16/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet Min. balance for APY $0 Learn More Member FDIC Marcus by Goldman Sachs Online Savings Account APY 3.30% 3.30% APY (annual percentage yield) with $0 minimum balance to earn stated APY. Accounts must have a positive balance to remain open. APY valid as of 12/21/2022. Min. balance for APY $0 Learn More Member FDIC Discover Bank Online Savings APY 3.30% Advertised Online Savings Account APY is accurate as of 12/21/2022 Min. balance for APY $0 These cash accounts combine services and features similar to checking, savings and/or investment accounts in one product. Cash management accounts are typically offered by non-bank financial institutions. These cash accounts combine services and features similar to checking, savings and/or investment accounts in one product. Cash management accounts are typically offered by non-bank financial institutions. Learn More on Wealthfront's website Wealthfront Cash Account APY 3.80% Min. balance for APY $1 Learn More on Betterment's website Betterment Cash Reserve – Paid non-client promotion APY 3.75% Annual percentage yield (variable) is as of 12/09/2022. Min. balance for APY $0 Learn More Member FDIC Marcus by Goldman Sachs High-Yield CD APY 4.30% 4.30% APY (annual percentage yield) as of 12/21/2022 Term 1 year Checking accounts are used for day-to-day cash deposits and withdrawals. Checking accounts are used for day-to-day cash deposits and withdrawals. Learn More Member FDIC SoFi Checking and Savings APY 2.50% SoFi members with direct deposit can earn up to 3.25% annual percentage yield (APY) on savings balances (including Vaults) and 2.50% APY on checking balances. There is no minimum direct deposit amount required to qualify for the 3.25% APY for savings and 2.50% APY for checking balances. Members without direct deposit will earn 1.20% APY on all account balances in checking and savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 11/30/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet Monthly fee $0 Read review Upgrade Rewards Checking APY N/A Monthly fee $0 Learn More Deposits are FDIC Insured Current Account APY N/A Monthly fee $0 Learn More Deposits are FDIC Insured Chime Checking Account APY N/A Monthly fee $0 Learn More Member FDIC Axos Bank® Rewards Checking APY 1.25% Receive monthly direct deposits totaling $1,500 or more to earn 0.40% APY. Use your Axos Visa® Debit Card for a total of 10 transactions per month (min $3 per transaction) or sign up for Account Aggregation/Personal Finance Manager (PFM) in Online Banking to earn 0.30% APY. Maintain an average daily balance of $2,500 per month in an Axos Managed Portfolios Invest Account to earn 0.20% APY. Maintain an average daily balance of $2,500 per month in an Axos Self Directed Trading Invest Account to earn 0.20% APY. Use your Rewards Checking account to make your full monthly Axos consumer loan payment to earn 0.15% APY. Monthly fee $0 Money market accounts pay rates similar to savings accounts and have some checking features. Money market accounts pay rates similar to savings accounts and have some checking features. Read review UFB Best Money Market APY 4.11% Min. balance for APY $0 Learn More Member FDIC Discover Bank Money Market Account APY 3.20% Min. balance for APY $1 EXPLORE MORE ACCOUNTS
Cons to investing in CDs
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1. You lose access to money in a CD. You can think of CDs as locked storage boxes for some of your money. Once you put an upfront sum into a CD, you can’t add or remove any of it until the day the term ends, which is known as its maturity date. If you break the lock early, the entire balance is withdrawn and there’s a penalty. (For more details, see how CDs work.)
2. CDs have early withdrawal penalties. Breaking into a CD before it matures usually results in a penalty, which can range from several months’ to a year’s worth of interest. In some cases, the penalty might include part of the original amount you put in. (See our article CD penalties by bank for some examples.)
3. Having a fixed rate can mean missed opportunities. Having a CD can mean hanging onto a high rate even when banks drop rates on savings accounts and new CD offerings, but the flip side is getting stuck with lower CD yields if rates rise. A fixed rate can be a blessing or curse depending on how future rates fluctuate.
» Want more context on rates? See current CD rates
3 situations when CDs work best
CDs have historically offered some of the highest guaranteed returns among bank accounts, but that doesn’t automatically make them the best home for your savings or investments.
“You can go golfing with a baseball bat, but it doesn’t work as well as clubs,” says Derek Brainard, national director of financial education at the nonprofit AccessLex Institute. Similarly, “a lot of people think of CDs for investing goals, but they might not be the most appropriate.”
CDs can work well in the following three scenarios:
1. Locking up savings for a near-future purchase
This may include savings for a down payment on a home or car you plan to buy within five years. Other goals might be moving to another city or going on a dream vacation. Whatever the goal, the money won’t be used until you’re ready and can stay safely out of reach in CDs. (If you have savings goals but don’t want to lose access to your money, consider high-yield savings accounts instead.)
2. Keeping some savings at a distance
CDs can be a way to stop yourself from spending an earmarked sum, whether that’s money you’ve saved up over time or a windfall such as from an inheritance. In addition, by creating a barrier to those funds with a CD, you have time to determine what to do with the money later, whether that’s investing, saving or spending it. In the meantime, your money can earn more interest than it would in a regular savings account.
3. Ensuring returns without market risk
Investing in CDs without a future purchase in mind might make sense for those who want to avoid risking their money in the stock market.
But remember that CDs are more for short-term safety than for long-term growth. For retirement savings, financial advisors often suggest an asset allocation that involves holding more stocks than bonds or CDs when retirement is decades away, and shifting to more bonds or CDs as retirement nears, to minimize the risk of losing money.
Strategies to combine flexibility and high rates
In a rising-rate environment, you might worry that the rate you lock in today won’t be as high as tomorrow’s or next year’s rate. Here are two ways to feel good about opening CDs while anticipating higher rates:
1. Use a CD ladder
This investment strategy involves splitting up your intended CD sum and putting equal amounts into multiple CDs of different term lengths at once. Usually, you get terms separated by a time frame that’s easy to remember, such as a year. A standard CD ladder consists of five CDs with terms of one year, two years, three years and so on. (The shortest ladder would be CD terms of three months, six months, nine months and so on.) When each CD ends, you can either reinvest that sum in a new CD for a longer term or withdraw it. Learn more about how CD ladders work.
2. Open a no-penalty CD
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If you want to test the waters with CDs, a no-penalty CD takes away the worst part of the CD (the early withdrawal penalty) and lets you earn interest at a fixed rate. You still can’t access money regularly as you would with a regular savings account, but you can withdraw nearly at any time after the first few days. That can mean jumping to a CD with a higher rate when you’re ready. No-penalty CD terms tend to be close to one year, and rates aren’t as high as the best CD rates, but rates are comparable with high-yield savings accounts. Check out the best no-penalty CD rates.
Awaken your dormant DNA ability to attract wealth effortlessly
The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.
Awaken your dormant DNA ability to attract wealth effortlessly
The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.
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