Certificates of Deposit (CDs) Are Having a Moment. Here’s Why, and How They Can Fit Into Your Savings Strategy

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Certificates of deposit (CDs) are typically an under-the-radar saving 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 steadily climbing, too. The best CD rates available today are over 3% and will likely be higher by the end of the year. 

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

As a result, more Americans are becoming interested. The number of people searching for information about CDs in recent months has more than doubled compared to a year ago, according to Google search data. The interest surpasses even 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 peak popularity for the visible term.

At NextAdvisor, we’re more interested in what certificates of deposit have to offer in today’s rising rate environment, too. They often have stricter requirements for withdrawals and term limits than savings accounts, but they’re a safe place to store money you’d rather not risk in the stock market — whether as a rainy day fund or for a down payment in a few years. 

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

Here’s more about why CD interest is booming, and when you should consider adding CDs to your savings strategy. 

Why Are People So Interested in CDs?

Over the past few years, federal interest rates hit record lows. Even before then, the Fed lowered rates throughout 2019. So many people lost interest: locking in a CD rate at a very low APY isn’t often very appealing.  

But as rates continue to rise, CD rates are rapidly increasing, too. Many — especially longer-term certificates of deposit — offer higher rates than other high yield accounts today.  Though rates are expected to continue increasing through the rest of this year, locking in a fixed interest rate to earn a guaranteed return can give some consumers peace of mind in case rates do drop in the next couple of years.

“People might be interested in CDs because of the stability, guaranteed rate of return, and return of principal [balance],” says Ian Wild, a certified financial planner and founder of All-Pro Advisors in Pittsburgh, Pennsylvania.  

Given that inflation is the highest it’s been in decades, many Americans now have a taste of what it means to have the purchasing power of their savings eroded, says Anora Gaudiano, CFP and assistant vice president of Wealthspire Advisors in New York. 

Many consumers saw a dip in their savings due to the pandemic and now, coupled with the fear of inflation continuing to rise, they want to be prepared with more money on hand, agrees Tony Chan, CFP, investment advisor and tax planner at Crossroads Planning in Orange, California. 

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, says Selden.

Right now, national averages for certificate of deposit rates are relatively low: 0.25% for a 1-year term, 0.37% for 3 years, and 0.48% for five years, according to FDIC data. But there are plenty of options with much higher rates. Here are our picks for the best CD rates available today:  

Say you have $1,000 to invest into a 1-year CD right now at 2.5%. By the end of that term, you’ll earn a return of $25 — that’s a relatively small return, but it’s better than you’ll find from many similarly safe deposit accounts today.

Before you lock in a certificate of deposit APY though, consider your savings goal and how a CD term may help secure your money for the time you need. “Some return is better than no returns, and leaving [it] in cash or earning close to nothing in savings,” says Chan. 

Pro Tip

If you’re not ready to invest in a longer term CD right now or you don’t want to miss out on rising rates, you can open a 1 month or 3 month CD. When the term ends, you can open a different account with the same money, says Selden.

How to Use CDs in Your Savings Strategy

CDs are a secure account option to ensure that you’re earning interest on money you want to set aside for a future goal. 

However, CDs do have shortcomings, like penalties if you make an early withdrawal and a fixed APY. And it can be a tricky balance to lock in the rate you want. While federal interest rates continue to increase, you could risk locking in a long-term CD at a rate that’ll only increase over the next few months. On the flip side, if rates go down next year or the year after, locking in a CD before a rate drop could help you maintain some value — but if you wait too long, you could get a very low return.

In today’s rising rate environment, it may be helpful to stick with shorter-term CDs with competitive rates, or start building a CD ladder which can help you take advantage of rising rates over time. If you’re putting away money to reach a relatively short-term savings goal, such as a wedding or starting a business, CDs guarantee you’ll earn a small return on your investment. 

But a CD should not be your only method of saving or investing, says Gaudiano. 

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

Despite the current bear market and the rough start it’s had this year, the stock market historically averages about a 10% return for investors each year. CDs can offer short-term security and 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.