As inflation takes a toll on people’s finances, interest rates are on the rise, which can benefit those investing in certain types of accounts. One such investment is a certificate of deposit (CD), which is a fixed-income account that offers a set rate of return over a set period of time.
CD accounts require the deposited funds to remain locked in for up to 10 years and interest is earned on a regular basis. With some CDs currently offering returns of up to 5%, it may be a good time to consider opening a CD account and locking in a favorable interest rate to grow your savings.
Now here are a few reasons why it may a great time to lock in a CD rate right now.
1. Current CD interest rates are really high
At present, CDs are providing an annual percentage yield (APY) of as much as 5% or even more, which is primarily because of the Federal Reserve’s efforts to combat inflation by increasing Federal funds rate.
This significant increase in CD rates is a rare occurrence that has not been observed in the past 20 years, which implies that CDs could be a valuable alternative for fixed-income investments. Additionally, the unique aspect of CDs is that you can secure a particular CD rate for an extended period, up to 10 years, even if CD rates fall in the future.
Therefore, investing in CDs may be a wise decision for individuals who are seeking to maximize their savings with the assurance of a fixed income.
2. CD interest rates will possibly decline at the end of the year
The Federal Reserve has been increasing interest rates to combat inflation, but inflation rates have started to decline quickly. As a result, the Fed may halt the Federal funds rate hikes and might even switch to decreasing interest rates by the end of the year.
This could cause CD rates to drop once again, making it advantageous to secure a CD now to obtain some of the highest available rates. It’s worth noting that while CDs are a safe investment, they are not without risks. CDs often have early withdrawal penalties, which can reduce or even eliminate any interest earned if funds are removed before the CD’s term ends.
Additionally, tying up funds in a CD for a longer period of time means that the money will not be available for other investments or expenses.
3. CDs returns are better than other low-risk investments
When it comes to investing your money, there are various options available that offer fixed income and low-risk. However, not all of them provide the same level of return as a Certificate of Deposit (CD).
While high-yield savings accounts, bonds, and U.S. Treasuries offer higher yields than regular savings, some CDs are currently offering higher rates than these investments. Despite the higher returns, CDs are considered a secure investment as they are FDIC insured and usually held by regulated financial institutions.
This makes them an attractive option for those who want to earn more on their savings while minimizing their risk.
4. CDs guarantee predictable returns
Certificates of deposit (CDs) offer investors a guaranteed fixed rate of return for a specific period of time, which means that you know exactly how much you will earn before you invest. The interest rate is locked in for the duration of the CD, and the rate of return doesn’t change, even if interest rates fluctuate during the investment period.
CDs can be a good option for those who are looking for a stable and predictable source of income in an unstable market. Additionally, CDs compound interest over time, which means that you earn interest not only on your initial investment, but also on the accumulated interest. This compounding effect can help your money grow faster than it would in a traditional savings account.
Moreover, as I stated earlier, CDs are FDIC-insured, which means that if the bank fails, your investment is insured up to $250,000.
5. CDs offer a wide selection of terms
CDs come with different term lengths, which you can choose based on your investment goals and the amount of time you’re willing to lock your funds. They typically range from one month to ten years, with various rates depending on the length of the term. Choosing a term length is important as it affects the amount of interest you can earn, and you should consider your financial goals and liquidity needs before deciding.
For instance, if you’re saving up for a down payment on a home in a few years, you may want to opt for a two or three-year CD that earns a higher rate than a shorter-term CD or savings account. On the other hand, if you need access to your funds in the short term, a one-month or three-month CD may be a better option.
It’s crucial to note that generally longer-term CDs offer better interest rates than shorter-term ones, but they may require a higher minimum deposit. Moreover, while longer-term CDs can provide higher returns, it also means that your funds will be locked up for an extended period, which may not be ideal for everyone.
