Certificates of deposit, or CDs, offer you a chance to keep your cash safe from loss of principal — and potentially earn a higher yield than what you’d get with a savings account.
With a CD, you commit to keeping your money locked up for a set amount of time, and the bank or credit union often rewards you by paying a higher yield than that of a standard savings account. The flipside, however, is that you could end up paying penalties and fees if you withdraw your money early.
Before you incorporate CDs into your investment strategy, here are a few things to keep in mind.
While still high, CD rates have dipped and may drop further in 2024
Among CD terms Bankrate monitors between six months and five years, top annual percentage yields (APYs) have declined slightly — by an average of 0.32 percent — since mid-December.
While leading rates have dipped, they remain elevated, overall. APYs of 5 percent or above can still be found on common terms of up to 18 months, while slightly lower rates are available on terms between two years and five years.
The slight rate decreases have occurred as banks anticipate the Federal Reserve lowering its key benchmark rate yet in 2024.
What a Federal Reserve rate cut would mean for CD investing
To combat high inflation, which peaked at an annual rate of 9.1 percent in June 2022, the Fed raised rates a whopping 5.25 percentage points between March 2022 and July 2023. This brought the federal funds rate to a range of 5.25-5.5 percent, which is its highest level since 2001.
Yields on competitive CDs and savings accounts tend to follow the federal funds rate. Overall, APYs on competitive CDs are currently at their highest in over a decade.
However, deposit account yields won’t stay so high forever. Economists expect the Fed to begin modestly cutting rates in September, as the inflation rate has been easing but hasn’t yet hit the Fed’s goal of 2 percent.
Most CDs require you to lock in your funds to earn a fixed APY, which is guaranteed to remain the same throughout the CD’s term. Securing a high fixed APY can benefit you if the going rates drop on new CDs.
“With a Fed interest rate cut looming as soon as September, now is the time to lock in CDs,” says Greg McBride, CFA, Bankrate chief financial analyst. “There is no incentive to wait as yields will trend lower as we get closer to an interest rate cut and even more so once the Fed actually starts cutting rates.”
Pros and Cons of investing in CDs
Pros
- Potentially higher yield than savings accounts
- Principal remains protected
- Guaranteed rate of return
- Possibility of adding long-term stability to a portfolio with a CD laddering strategy
Cons
- Money isn’t as liquid as in a savings account
- May face penalties for withdrawing money early
- Yields don’t always beat inflation
- Returns are often low compared to stocks and ETFs
When investing in a CD is worth it
One of the biggest reasons to use CDs is for security. You don’t have to worry about losing your principal because the money is usually held in an insured account.
For those looking to keep a portion of their portfolio in a principal-protected investment for the long term, using a CD laddering strategy — in which your CDs mature at different points — can be one way to add stability.
CDs can also be useful to save for the short term — six to 18 months. Locking up some of your money in a CD can help keep you from dipping into your funds for other purposes and ensure the money goes to the proper goal, says Morgan Blackman, wealth coach, investor and founder of Holistic Bucks Coaching based in Ontario, Canada.
When investing in a CD is not worth it
While CDs can provide some guaranteed returns over time and some level of security, they’re not likely to provide you the returns needed to build wealth for retirement over time. Instead, it might make more sense to build wealth with other assets and only use CDs for a portion of your portfolio.
Additionally, CDs might not be worth it if you need more access to your savings, since there’s typically a penalty for withdrawing the money early. For example, if you’re building an emergency fund, avoid keeping that fund in a CD. It’s better to store your emergency fund in a savings account, where you can withdraw the money whenever it’s needed.
Alternatives to CDs in 2024
While some CD rates are currently outpacing the rate of inflation, you might decide it’s best not to lock up your funds. Or, you might choose to diversify your funds among CDs and other types of investments.
These options include Treasury Inflation-Protected Securities (TIPS), which provide some protection against inflation while being fairly safe. The effective interest rate paid on TIPS moves up or down, along with inflation.
“Consider low-risk mutual funds as well,” says Blackman of Holistic Bucks Coaching. “They aren’t as risky as stocks, but they can still yield better returns than CDs.”
Fred Jacobs, senior manager, media relations and sponsorships at Ent Credit Union, Colorado’s largest credit union, suggests looking into money market accounts and mutual funds, as well as bonds and dividend-paying stocks.
Finally, another option that might make sense is a fixed annuity. If you already have a large chunk of capital and are looking for something stable, a fixed annuity might provide better returns than a CD. These contracts, typically made with an insurance company, guarantee a certain amount of income for a set period.
“The most important factors to consider are your risk tolerance and how potential returns compare among CDs, stocks, bonds, mutual funds and other products that would provide you with a rate of return for your money,” Jacobs says.
Bottom line
As part of a portfolio that includes cash, CDs can provide stability and security. However, CDs are unlikely to provide you with the returns you need to build wealth for the future or live off the interest — unless you already have a large amount of money and ladder your CDs to avoid penalties.
Additionally, CDs lack the liquidity you’d need for something like an emergency fund. To recession-proof your finances, it’s important to establish an emergency fund in a savings account before focusing on other investments.
“I recommend speaking with a financial advisor to compare your options,” Jacobs says. “Discuss your risk tolerance and timelines, and determine the best products for your individual situation.”
— Former Bankrate writer René Bennett contributed to a previous version of this story.
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