I'm a personal finance expert: Here's why you need to invest in a CD today

If you’ve been thinking about opening a certificate of deposit, now is the time to take action. The Federal Reserve announced a sixth straight hold on its benchmark interest rate this afternoon, and banks are offering some of the highest yields on CDs in decades.

Because CD rates are fixed, it means that you can lock in today’s high rates and enjoy historic earning potential even if the Fed were to cut rates later in the year. But while CDs offer a safe way to earn interest on your savings, they may not be the right choice for everyone.

Consider your options before signing up — especially if you think you’ll want access to those funds before a CD matures.

How the Fed rate affects certificates of deposit

The federal funds rate affects all interest rates available through financial institutions, including APYs for certificates of deposit. The Federal Reserve sets or holds this Fed rate at eight meetings over the course of the year, and it influences rates that banks charge to lend each other money.

Financial institutions typically pass on savings or extra costs to customers as consumer interest rates. So when the Fed rate is high, mortgages, car loans and other debt will cost you more in interest.

But you’ll also get a higher rate of return on products like CDs and savings accounts.

Why you might want to invest in a CD today

There are several reasons why you might want to invest in a CD right now, especially if you’re recently retired.

CD rates may be at their peak

Even the Fed officials who believe interest rates won’t decrease dramatically this year don’t see a rise in rates on the horizon. This means that CD interest rates likely won’t get any higher than they are right now. Opening a CD now means you’ll earn a higher rate of return than you might get in even a few months.

Rates of return are guaranteed

A main benefit of CDs is guaranteed fixed rates. This means that the rate you receive when you sign up applies for the length of the term, even if interest rates drop. These guaranteed returns can make it a lot easier to plan for the short-term future, since you can predictably know how much money you’ll have when the CD matures.

This is unlike high-yield savings accounts that come with variable rates, which are difficult to predict more than a year out — and a major event can throw those predictions to the wind if the Fed needs to jump in to cool off or resuscitate the economy.

APYs compare to retirement portfolios

Retirement accounts like 401(k)s typically have an annual average rate of return between 5% and 8% a year, depending on market conditions. If you’re close to retiring or are already retired, putting some of your retirement savings into a CD can offer peace of mind by guaranteeing regular returns — regardless of what’s happening on Wall Street.

CD ladders can provide rolling returns

Laddering your CD involves investing in several shorter CDs with varying terms, rather than one long-term CD. So, instead of investing $10,000 in a 12-month term, you might invest $2,500 in four CDs with 3-, 6-, 9- and 12-month terms. When the CD with the shortest term matures, you can decide to reinvest those funds in another CD or hold off until rates are more favorable.

A CD ladder can help you take advantage of the high yields banks currently offer on terms of up to 12 months. Laddering also allows you to take advantage of high-rate promotional offers, even if the term isn’t exactly what you’re looking for.

Another perk of laddering is the fact that you can avoid withdrawal penalties by reclaiming access to some of your funds before the longest term is up.

Inflation is going down steadily

A 4% or 5% APY is still higher than the current 3.5% inflation rate, which, while an increase from 3.2% in February, is projected to fall. After all, inflation is among the reasons the Federal Reserve is holding the Fed rate with a focus on getting the inflation rate back down to an average 2% from a peak of 9.1% in June 2022.

With rate cuts on the horizon and inflation ticking down, now is the sweet spot for opening a CD. That 4% or 5% will contribute more to your purchasing power than a CD you might have invested in while inflation was on the rise. And these high-rate deals won't be around forever.

Other ways to leverage high rates

Putting your money into a CD isn’t the only way to leverage high rates. Moving your savings balance into a high-yield savings account may offer similar returns in the short term — and you won’t have to pay a fee if you need access to those funds sooner than expected. You can also continually add to an HYSA, helping you to leverage compounding.

Money market accounts are deposit accounts with benefits that fall between a CD and an HYSA. While money market account rates tend to be lower than a CD's, yields are higher than a traditional savings account. And they come with check-writing and debit privileges, though you might need to meet a minimum deposit or monthly balance requirements to avoid fees.

Higher-risk investments such as index funds, mutual funds and stocks have the potential to earn stronger returns than both CDs and HYSAs — though with higher risk of losing your money. Treasury bills are typically considered a low-risk investment and offer returns like those of the most competitive CDs available today.

Dig deeper: High-yield savings account vs. CD: What to know when rates are high

How certificates of deposit work

A CD is a deposit account that works by holding on to your money for a fixed amount of time while paying out interest. CD terms can range from one month to five years or longer, during which you can’t access your money unless you pay a penalty.

CDs earn compound interest, which means you receive returns on both the deposit and any accrued interest monthly, quarterly or annually, depending on your bank. After the CD term matures — or expires — you get your principal and interest earned over the term. At that point, you can move your money to another account or renew the CD.

CD rates are tied to the Fed rate, which has seen an increase by the Federal Reserve 11 times from March 2022 to July 2023. Before the Fed began raising interest rates, the national rate for a 12-month CD was 0.15%. That average rate has increased more than twelvefold since — with the highest rates available today reflecting far higher rates of 4.5% to 5% or more.

Average national deposit rates on CDs

Compare today's highest yields on CDs to the average national rates on a $10,000 minimum deposit between April and March 2024, as reported by the FDIC.

Sources

• Consumer Price Index Summary, U.S. Bureau of Labor and Statistics. Accessed May 1, 2024.

• National Rates and Rate Caps, FDIC. Accessed May 1, 2024.

About the writer

Anna Serio-Ali is a trusted lending expert who specializes in consumer and business financing. A former certified commercial loan officer, Anna's written and edited more than a thousand articles to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in Business Insider, CNBC, Nasdaq and ValueWalk, among other publications, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020 for her work at Finder.