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CDs might pay more than last year, but that doesn’t mean they’re the right place to bang your buck.
key points
- CD rates are rising now as the Federal Reserve hikes interest rates.
- While you might be tempted to crack open a CD, there might be a better home for your money.
The Federal Reserve is raising interest rates this year to slow inflation. This makes borrowing more expensive across the board. But it also does this so that the banks pay more generously to savers.
If you look at your savings account today, you’ll see that the interest you’re getting on your money is higher than it used to be. Similarly, certificates of deposit or CDs now pay higher interest rates. So if you have money that you don’t need right away, you might be ready to open one.
But are CDs really such a good choice at the moment? Here’s why they may be — and maybe not.
reverse opening of 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 typically pay more interest than savings accounts. So if you leave the money in the bank, it may be worth keeping it somewhere else where it makes more money.
Disadvantages of opening CDs
With a CD, you commit to holding onto your money for a predetermined period of time. Cashing in a CD early means you lose money – usually a few months’ interest – in penalties, while a regular savings account lets you make fee-free withdrawals at any time.
If you deposit money into a brokerage account, that money is also unrestricted. You have the option to repay the investment at any time without penalty. Just as importantly, you can get a much higher return on your money with a brokerage account than 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:
- Do I expect to need this money 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 cash earmarked for a short-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 hone your investment knowledge.
- Do I have a full emergency fund? Some people will tell you that CDs are a good place to put your savings in case of an emergency. In fact, 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 the more attractive bet given higher interest rates, they may not be the best place to put your money. Be sure to go through the different options before you put your money into a CD – especially for a longer period of time.
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