Now that interest rates are rising, are CDs a better choice?

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CDs might pay more than they did last year, but that doesn’t mean they’re the right place to bang your buck.


Important points

  • CD rates are rising now as the Federal Reserve hikes rates.
  • While you might be tempted to crack open a CD, there might be a better home for your money.

The Federal Reserve has raised interest rates this year to slow the pace of inflation. This makes borrowing more expensive across the board. But it also ensures that banks pay savers more generously.

If you take a look at your savings account today, you might notice that the interest rate you’re getting on your money is higher than it was at the beginning of the year. Similarly, certificates of deposit or CDs now pay more interest. So if you have money that you don’t need right away, you might be tempted to open one.

But are CDs really such a good choice at the moment? Here’s why they may be — and maybe not.

The benefit of opening a CD

When you put money into a CD, your capital is protected. Deposit $5,000 in a one-year CD and leave that money alone for 12 months, and after one year you’re guaranteed your $5,000 plus interest back. Also, CDs usually pay more interest than savings accounts. So if you’re keeping money in the bank, it might be worth investing it somewhere where it’s earning more.

The disadvantage of opening a CD

With a CD, you commit to keeping your money under lock and key for a preset period of time. Cashing out a CD early means losing money – usually a few months’ worth of interest – as a penalty, while a regular savings account lets you withdraw at any time with no fees.

When you deposit money into a brokerage account, that money is also not restricted. You have the option to cash out investments at any time without penalty. Just as importantly, you can potentially get a much better return on your money with a brokerage account than you would with a CD – even if today’s CD prices are higher.

Where should you invest your money?

If you’re not sure if a CD is right for you, ask yourself a few questions:

  • Is this money expected to be needed within five years? In this case, a CD might be a better choice than a brokerage account because your capital is protected. If you have money set aside for a shorter-term goal like buying a home, you should avoid investing it.
  • Am I comfortable with the idea of ​​investing? For some people, investing means losing sleep at night. If that sounds like you, you might want to stick to a CD for now and take some time to expand your investing knowledge.
  • Do I have a full emergency fund? Some people will tell you that a CD is a good place to keep your emergency savings. In reality, you really should stick to a regular savings account because if an emergency arises and you need access to that money, you don’t want to face penalties.

While CDs are now a more attractive bet given higher interest rates, they may not be the best storage option your Money. Make sure you go through different options before committing your money in a CD – especially a longer-term one.

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