For the kitchen-table investor with a little money to spare, now might be an ideal time to consider investing in a certificate of deposit.
CD rates are as high as they’ve been in years. The best one-year CDs offer 5.66% annual interest, according to a January survey by WalletHub, the personal finance site. The best six-month CDs top out at 5.75%.
“No doubt, CDs are getting more attention these days,” said Chris Starr, head of consumer and business deposits at Wells Fargo Bank.
CDs spook some investors. In a 2023 survey by Forbes Advisor, 41% of Americans said they had never opened one. Some respondents said applying for a CD was “too complicated and time-consuming,” and others didn’t want to lose access to their money.
Certificates of deposit may be unfamiliar to many, but bank officials say the application process is not, in fact, particularly complicated or time-consuming.
Learn more: Best current CD rates
“Opening a CD is simple and can be done from your phone or computer in a matter of minutes,” Starr said.
How a certificate of deposit works
When you open a CD, you agree to surrender your money to the bank for a set length of time. In exchange, the bank generally offers you a higher rate of interest than you might get in an ordinary checking or savings account.
The longer the CD’s term, as a rule, the higher the interest rate. Yet, over the past couple of years, the rules have gone out the window. A campaign of aggressive interest-rate hikes by the Federal Reserve sent rates skyrocketing in 2022 and 2023.
Market forecasters expect rates to ease in 2024 and beyond. As a result, somewhat counterintuitively, interest rates are now generally higher on short-term CDs than on long-term ones.
In the WalletHub survey, the top five-year CD offers 4.75% interest. Investors can nab higher rates on CDs with terms ranging from three months to a year.
“We’re in an unusual circ*mstance right now where the returns for shorter CDs are higher than the returns on longer terms,” said Greg McBride, chief financial analyst for Bankrate. “The expectation is that interest rates are going to come down over the coming years.”
With interest rates at 5% or higher, experts say, the best CDs are competitive with the best high-yield savings accounts, and with bonds.
To open a CD, you must be willing to part with your money
But CDs are not for everyone.
To open a CD, you must be able and willing to part with your money for the full term of the investment. You can withdraw the money early, but then you face penalties that can sap the interest and even some of the principal.
“You have to be able to live without the money for the term of the CD,” McBride said.
A CD would not be a good idea for anyone who lacks a fully funded emergency savings account, McBride said. Not quite half of American adults have enough savings to cover three months of living expenses, according to a recent Bankrate report.
For investors who can afford to lock up some of their savings in a CD, the rewards are obvious: “guaranteed earnings,” said James Morgan, vice president of savings and deposits at Capital One.
The certificate pays interest at a fixed rate for its full term. The same cannot be said for the typical high-yield savings or money market account, whose interest rate generally fluctuates with the market.
CDs come in many lengths: three months, six, nine or 10, or a year or longer.
“People who are considering a CD should really shop around and consider a range of options,” Morgan said.
Let’s say you want to set aside some money for gift shopping in the 2024 holiday season. A one-year CD won’t work, because you won’t get your money back until 2025. But a nine- or 10-month CD might be perfectly timed.
“It gets back to knowing your savings and your cash needs,” said Frank Newman, director of portfolio construction and due diligence at Ally Financial.
As of early January, Ally offered rates in the 5% to 5.25% range for CDs with terms of six to 12 months.
Not every bank offers rates that high. The average rate for a one-year CD hovered around 2% in late 2023, according to Bankrate.
Don't miss out:Many Americans are failing to get high-interest savings accounts.
Short-term CDs pay better interest, but investors should also consider longer terms
Today’s rates make short-term CDs look appealing, but experts say investors should also consider longer terms.
Banks set CD rates based on their best estimates of what will happen to interest rates in the months and years to come. Rates are lower now for longer terms because forecasters predict overall interest rates will eventually ease.
“Some people may look at a two-year and three-year CD and get turned off: ‘This has a lower rate than a one-year CD or a six-month CD. What a scam,’” said Odysseas Papadimitriou, founder and CEO of WalletHub. “Well, there is no scam here. The market is predicting rates will come down.”
Banks “know better than us whether the rates are going to go down, and when,” Papadimitriou said.
So, if a bank offers you a slightly lower rate on a five-year CD than on a one-year CD, “that doesn’t mean you’re getting a worse deal,” he said. “You’re getting a fair deal, based on what the market is predicting.”
Daniel de Visé covers personal finance for USA TODAY.
