Is a certificate of deposit (CD) still a good investment?
Interest rates on certificates of deposits (CDs) are falling, and could fall further this year.
CD rates have been falling since September 2024, when the Federal Reserve launched a recent flood of federal funding rate cuts. Today, the average account is currently under 2%.
The outlook can be disappointing if you want to get the best possible rate in your savings. But that doesn’t mean that CDs are a bad bet. In fact, you can find an account that pays for 4.50% APY as well. Additionally, you will have time to invest before any expected future fee changes take effect.
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Although CD rates are falling, CDs are still a good place to invest a portion of your money.
In particular, CDS is a great option for holding the money you’re saving for a specific future goal. Think about it: a down payment of your home or funds for your summer wedding.
Putting money on a CD will lock you into a competitive fixed interest rate for a certain period of time (usually six months to five years). Then you can access your money for free at a later date when you need it.
How much can you earn from a CD against a savings account? Account dependent, but on average, CDS currently offers about 1 percent more points than traditional savings accounts. Better yet, the interest rate on CDs is fixed. That is, it will not change at any time during the period. However, the same does not apply to savings accounts where interest rates fluctuate.
In other words, if you find a CD with the same rate as a high-yie savings account (HYSA) that pays 4.50% APY, a CD may be a better option. However, you will need to make sure you do not need to tap these funds until your account reaches maturity. Otherwise, you will be subject to an early withdrawal penalty, wiping out some or all of your interest income.
read more: Best CD Rates on the Market today
Do you want to ensure you get the most competitive return on CDs? You need to do some research and preparation in advance. There are several ways to get the best results.
CDs are not a good place for emergency savings as they face penalties if they need to withdraw money before maturity. So instead of putting all your savings on CD, make sure you have cash in a fully liquid emergency fund.
read more: 4 best (and worst) places to keep your emergency funds
There are a large variety of CD rates offered by various financial institutions. Currently, the average CD generates between 0.23% and 1.82% (depending on the duration), but when you shop, you can find rates above 4%. For the best CD rates, you may need to go to a bank you’ve never used before.
read more: This map shows the best CD rates in all states
When the Federal Reserve adjusts the rate of federal funds, the CD rates move in tandem. By providing information about the Fed’s plans for future rate changes, you can predict whether CD rates may change in the near future. As a result, you can choose the best term for your CD.
Here’s how we will correspond to each of the following predictions from the Fed:
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The rate increases: Buy a short-term CD or consider setting up a CD ladder. This allows you to freely move your money to a higher yield CD after the Fed increases.
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Rate reduction: Prioritize long-term CDs that offer competitive lock-in rates beyond the expected rate reduction date.
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There are no changes: Compare interest rates and terms to determine which CD is best for you to get a solid return before you need money.
Will the Fed make any fee adjustments in 2025? This year’s forecast shifted from four interest rate cuts to two, but tariffs and other economic policies could increase inflation.
read more: Do I need to open a savings account or CD before the next Fed meeting?
Using CDS has trade-offs. In exchange for agreeing to deposit money in your deposit for a period of time, you can earn a higher deposit fee than you would get from a savings account. However, if you withdraw money early, you will face a penalty.
Early withdrawal penalties usually include forfeiture of several months’ interest, waive a defined percentage of your interest, or pay a flat fee. Depending on your account, you may also lose some of your principal deposits. Therefore, it is important to choose a CD term that matches your savings timeline.