Certificates of deposit (CDs) are having a moment. Here’s why and how to use them

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Certificates of deposit (CDs) are usually an under-the-radar savings tool, but they’ve suddenly become a hot topic this summer.

As the Federal Reserve continues to raise federal interest rates in an effort to slow runaway inflation, CD rates are also steadily rising. The best CD rates available today are above 3% and will likely be higher by the end of the year.

“Rates are rising across the board,” says Ayesha Selden, certified financial planner and franchise owner of Ameriprise Financial Services Inc in Philadelphia. While these higher rates are a downside if you’re in debt or applying for a mortgage, they’re a plus for savers.

As a result, more and more Americans are interested in it. The number of people searching for CD information in the past few months has more than doubled from a year ago, according to Google search data. The interest even exceeds the growing interest in products like high-yield savings accounts with variable APYs and more flexibility.

Source: Google Trends. Google’s 0-100 scale represents relative search interest over time, with 100 representing the peak popularity of the visible term.

We at NextAdvisor are also more interested in what certificates of deposit have to offer in the current rising rate environment. They often have stricter requirements for withdrawals and time limits than savings accounts, but they are a safe place to store money you’d rather not risk on the stock market, whether in the form of funds for rainy days or for a down payment in a few years. .

Higher-rate CDs — and their guaranteed future returns — have their advantages if you’re trying to prepare for a recession or offset at least some of the value your savings might lose in response to inflation. But is the added complexity that comes with them worth the higher yield?

Here’s why interest in CDs is booming and when you should consider adding CDs to your savings strategy.

Why are people so interested in CDs?

In recent years, federal interest rates have reached record lows. Even before that, the Fed cut rates throughout 2019. So many people lost interest: Locking in a CD rate at a very low APY isn’t often very attractive.

But as rates continue to rise, CD rates are also rising rapidly. Many – especially longer-term certificates of deposit – offer higher rates than other high-yield accounts today. Although rates are expected to continue to rise for the rest of the year, locking in a fixed interest rate to secure a guaranteed return may reassure some consumers in the event that rates fall over the next two years.

“People might be interested in CDs because of the stability, guaranteed rate of return and principal repayment [balance]says Ian Wild, Certified Financial Planner and founder of All-Pro Advisors in Pittsburgh, Pennsylvania.

With inflation at the highest in decades, many Americans are now getting a taste of what the eroding purchasing power of their savings means, says Anora Gaudiano, CFP and assistant vice president of Wealthspire Advisors in New York.

Many consumers have seen their savings decline due to the pandemic and now, coupled with the fear that inflation will continue to rise, they want to be prepared with more cash on hand, agrees Tony Chan, CFP, investment adviser and tax planner at Crossroads Planning in Orange, CA.

What can you earn with a CD right now?

Today, CD rates are generally slightly higher than variable APY high-yield savings accounts. And rates will continue to rise through the end of the year, Selden says.

At present, national averages for certificate of deposit rates are relatively low: 0.25% for a one-year term, 0.37% for 3 years and 0.48% for five years, according to the data. from the FDIC. But there are many options with much higher rates. Here are our picks for the best CD pricing available today:

Let’s say you have $1,000 to invest in a one-year CD right now at 2.5%. At the end of this period, you’ll earn a return of $25 – that’s a relatively low return, but it’s better than what you’ll find on many similar deposit accounts today.

Before locking up an APY certificate of deposit, think about your savings goal and how a CD term can help you secure your money for the time you need. “A return is better than no return, and leaving [it] in cash or earning next to nothing in savings,” says Chan.

Pro tip

If you’re not ready to invest in a longer-term CD just yet or don’t want to miss rising rates, you can open a 1-month or 3-month CD. At the end of the term, you can open a different account with the same money, Selden explains.

How to use CDs in your savings strategy

CDs are a secure account option to ensure you earn interest on money you want to set aside for a future purpose.

However, CDs have shortcomings, like penalties if you make an early withdrawal and a fixed APY. And it can be a delicate balance to lock in the rate you want. As federal interest rates continue to rise, you could risk locking in a long-term CD at a rate that will only rise over the next few months. On the other hand, if rates go down next year or the year after, locking a CD before a rate cut could help you maintain some value – but if you wait too long, you could get a very high return. weak.

In today’s rising rate environment, it may be worth sticking to short-term CDs with competitive rates, or start building a ladder of CDs that can help you take advantage rising rates over time. If you’re putting money aside to meet a relatively short-term savings goal, like a wedding or starting a business, CDs guarantee you’ll earn a small return on your investment.

But a CD shouldn’t be your only method of saving or investing, Gaudiano says.

Especially for long-term savings, you’ll want your money to have a better chance of outpacing inflation as it grows with the market in an account like a 401(k) or a Roth IRA. “It’s not achieved by keeping money in CDs, nice as that may seem in the short term,” says Gaudiano. “Depending on their time horizons and risk profiles, [people] should always be invested in a mix of stocks and bonds.

Despite the current bear market and the rough start to it this year, the stock market has historically averaged around 10% return for investors each year. CDs can provide security and short-term interest, but if you have long-term financial goals and time to weather market fluctuations, a diversified investment portfolio is still the best place to invest for the future.

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