While there are a few different types, CDs (short for certificates of deposit) are a saving vehicle used by banks and credit unions in which you agree to put your money away for a set amount of time and earn interest on it.
They earn interest at a fixed rate, meaning you lock in your interest rate when you open the CD, and it doesn’t change. Usually, that means better returns, but even the highest long-term CD rates available today are only around 3%, way below pre-pandemic rates.
If you have cash available now, it may be a good time to open a CD to take advantage of the rising interest, but there are better options for you, depending on your goals. Here are a few to consider:
Create an Emergency Fund in a High-Yield Savings Account
“What’s the point of getting your money tied up for months and not being able to take it out?” says Rebecka Zavaleta, creator of the investing community First Milli. “If you just had it in a high-yield savings account, you could pull it out immediately.”
High-yield savings rates have been increasing too, but in these accounts you’re not locked into a rate like you would be with a CD. You have the potential to make more as rates rise or move your money to other investments at any time.
“You will not get enough compensation for locking up your money in a CD,” says Dabney Baum, a financial advisor with Baum Wealth Advisors at Janney Montgomery Scott, a Boston-based financial advisory firm.
A high-yield savings account is a great place to store your emergency fund. You have the peace of mind that it’s secure, FDIC-insured, and easily accessible while earning some interest.
Pay Off High-Interest Debt
Debt is a drag on your earnings, so if you have the cash — and you’ve built a decent emergency fund—paying it down will be good for your financial health, says Robert Farrington, a debt expert and founder of The College Investor, a personal finance website geared toward millennials.
Debt will continue to become expensive as the Federal Reserve continues to raise the primary rate. Right now, the rate is between 2.25% and 2.5% due to inflation. And as rates increase, your interest rate for debt will go up, too.
“We’re in a big period of economic uncertainty, and the last thing you want is to have high monthly expenses, and your income is suddenly cut,” says Farrington.
Aside from being a great way to improve your financial situation, it’s also a guaranteed return. For example, if you have credit card debt that earns 20% interest and you pay it off, that’s a 20% return.
Make a debt payoff strategy before you go all in. Organize your debts and use the avalanche or snowball method to prioritize them. It’s wise to attack consumer debt with high-interest rates first, like credit cards or personal loans.
For example, Zavaleta still has student loan debt, but her federal loans are subsidized at a low 4% interest rate. “I refuse to pay it off because it’s subsidized,” Zavaleta says. “I pay the minimum, and maybe I’ll pay it off when I’m 40, but I really don’t care because I want the best return for my money.”
Even if you can’t or don’t want to pay off your balance in full, Baum recommends calling your debt holder to try and reduce your interest rate. “Paying 18% to 25% APR [annual percentage rate] is excessively high, even if you have poor credit history,” she says.
Invest for Retirement
If you have a long investment horizon for this money—meaning you don’t need to access it any time soon—investing in the stock market using an IRA or 401(k) makes more sense than a CD.
“Putting money into your retirement account is investing, too,” writes Erin Lowry, a NextAdvisor contributor and author of the “Broke Millennial” book series. “ The confusion might lie in the fact that we say ‘save for retirement’ instead of the more accurate ‘invest for retirement.’”
Over long periods of time, 401(k) and Roth IRA accounts can deliver returns as high as 6% or 8%. But your success depends on your investment strategy. For advice on building a simple but “good enough” starter portfolio, read Lowry’s advice here.
Experts recommend getting started as soon as you can, as long as you’ve first established some liquid savings you can access quickly, such as in a high-yield savings account.
Given that the Federal Reserve continues to increase the primary rate, it’s likely that CD rates will rise in the near future. But regardless of how much rates continue to rise, always weigh your options to decide how to best allocate your money.
If you have extra cash to invest now, you should first establish a baseline of emergency fund savings in a high-yield savings account. Then, explore other ways to maximize your dollars, such as paying off debt. If you’re able to afford your minimum expenses and stay current on debt payments, it’s time to start investing for your future by opening a retirement investing account.