If you’ve been considering opening a certificate of deposit, acting quickly can help you secure the best rate.
Certificates of deposits (CDs) let you lock in your savings rates, so even if rates drop during the time you hold your CD, you’ll still earn a guaranteed return. But first, you have to find the best rate, which is usually reserved for long-term CDs like three- and five-year terms.
Finding the best rate requires shopping around to compare rates, terms and account options at different banks. But as a rule of thumb, if rate increases are slowing down -- like we’re seeing now -- it’s time to start shopping around. And while the Federal Reserve raised rates again last month, we’re not seeing banks push long-term CD rates much higher.
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Here’s what experts have to say about long-term CDs, how they compare to short-term rates and other savings paths to consider.
Experts say it’s time to lock in a long-term CD
Over the past year, experts have advised against locking in long-term CDs with the caution that rates will go up. But now that’s changing.
“If you save for the long term and don’t need the money soon, it may be the right time to lock your rate for long-term CDs, such as for one to three years, depending on your needs,” said Silvermann. “The interest rate you can get is still high, around 4 to 5% APY.” Considering the possibility of a recession and likelihood that inflation will continue decreasing, he added that we may not see rates this high six months from now.
However, if you lock in a solid three- or five-year CD rate now, there’s a chance that the Fed continues to raise rates, echoed Cary Carbonaro, a certified financial planner and director of the Women and Wealth Division at Advisors Capital Management. “We don’t 100% know they are going to keep rising. They may stop, and when the economy is hit hard enough, they will be cut again.” If rates continue to go up, but you lock in a long-term APY now, you could miss out on a better rate.
But waiting to time when you lock in a savings rate might not make sense in our current high-rate environment. And, even if rates inch up a bit, waiting might not help you earn much more interest on your savings. Here’s a look at how much you’ll earn if you invest $1,000 in a five-year CD right now with a 4.02% APY -- based on CNET’s weekly CD average -- compared to how much you might earn if you wait and rates hit 5% APY.
| Deposit | APY | Interest earned after five years | Balance at end of term |
| $1,000 | 4.02% | $217.82 | $1,217.82 |
| $1,000 | 5.00% | $276.28 | $1,276.28 |
In this example, if you wait, you could earn $58.46 more in interest, assuming rates stayed at this level for the rest of the year. But with no guarantee that rates will get this high and experts predicting rates may start to slowly drop, if you wait, you might also end up with a lower savings rate, which could lower your return.
Is a short- or long-term CD a better investment?
A short-term CD is typically offered for one year or less, while a long-term CD spans eighteen months to five years. Finding the right fit largely depends on your goals for the money.
In most cases, you’ll earn a lower APY on shorter CD terms, such as three- or six-month CDs, but you might find this option beneficial if you don’t want to be tempted to spend this money. For instance, if you know you need $500 in three months to cover home repairs, you may put the money in a CD to earn interest and avoid withdrawing it because doing so could result in an early withdrawal penalty. Short-term CDs can also make sense in a falling rate environment, allowing you to lock in a higher rate before savings rates start falling.
But if your time horizon is a few years out, you may choose a long-term CD to earn a more profitable return at a higher rate. Usually, longer CD terms have higher rates since the bank will hold onto your money for longer. You may choose a long-term CD if you don’t want to risk market volatility or if you believe rates are peaking and want to lock in a high rate now.
Right now, rates are experiencing an inverted yield curve, meaning short-term CD rates are higher than longer-term CDs. In a normal rate environment, long-term CDs have higher average rates than short-term CDs.
Even with the potential for more Federal Reserve rate hikes, experts think we may have reached the tipping point for savings rates. There’s a chance that long-term rates may go up a bit higher, but short-term rates are expected to stay stagnant or fall.
Should I open a CD ladder?
If you’re worried about CD rates continuing to go up, experts recommend building a CD ladder. That way, you’ll have money coming due periodically (and penalty-free). Here’s how it works:
Let’s say you have $2,000 for a CD deposit. Instead of putting the money in one CD at one set term, spread the cash across several CDs with different terms. For this example, you’ll deposit $500 into four CDs: a six-month, one-year, 18-month and two-year option. In six months, you’ll have your money plus interest available to reinvest in another CD. You’ll do the same for the one-year CD and others that follow. You can continue the CD ladder as long as you want, with money coming due at different intervals in case you need to put those funds toward an expense.
If rates peak while some of your money is free, you’ll be able to lock in a long-term CD to take advantage of the highest APY while rates are still high. Whereas, if you lock all of your funds in a one- or two-year CD, you may risk missing the rate peak for longer terms because you’ll have to wait for your term to end or pay an early withdrawal penalty.
CD ladders require you to track maturity dates for each one, otherwise, the CD will automatically renew for most banks. Experts recommend shopping around to make sure you get the best APY.
Where else to stash savings right now
With the possibility of the Fed pausing rate hikes for the first time since March 2022, experts don’t expect savings rates to climb much higher. Ultimately, where you stash your savings boils down to your needs. Here are a few options to consider.
High-yield savings accounts
If you’re worried about job security as experts predict a recession, having money on hand in a high-yield savings account is important for emergencies.
“High-yield savings accounts offer attractive yields, with some online banks offering APYs over 4.5%,” said Chelsea Ransom-Cooper, financial planning director at Zenith Wealth Partners.
You’ll earn a solid return and access the money when needed without paying an early withdrawal penalty as you would with CDs. But most high-yield savings accounts are still lagging behind other options in the interest they pay, said Carey. And some banks are starting to quietly lower these rates, too.
Money market accounts
Liquid or flexible options, including a money market account, are worth considering. Some MMA rates are higher than high-yield savings and offer more flexibility. It’s a low-risk, FDIC-insured savings option of up to $250,000 per person, per account type. You can withdraw and deposit funds and make regular transactions as you would with a checking account. Carey added that the higher your balance, the higher your APY for some banks.
Specialty CDs
If you’re unsure about rates or liquidity, consider specialty CDs such as a bump-up or no-penalty CD. However, these options tend to have lower APYs compared to traditional CDs. “You may sacrifice some potential earnings for the flexibility,” said Carey.
More importantly, now’s the time to save. Every penny can add up, and interest-earning deposit accounts can push you closer to your savings goals before rates drop even further. Since experts predict that rates will remain steady for a while, it’s best to open an account now to start earning interest before it’s too late.
FAQs
It all depends on your financial needs. If there’s a chance you’ll need the money for an emergency or as extra cash, it’s best to consider more flexible options, like a savings account. That way, you won’t be penalized if you withdraw the money, and you can regularly contribute. If you’re certain you won’t need the funds, however, you can consider a CD to avoid spending it and still earn a return.
An in-between option experts recommend is a CD ladder. You can spread the savings across several CD terms to have money available after each term ends without paying a withdrawal fee.
The downside of a CD is the liquidity or limited access to the money during the CD term. If you need the money, you’ll pay a withdrawal penalty fee, which is usually a few months of interest.
Some banks are still increasing their high-yield savings account rates, but not many. Instead, most rates are the same from week to week. And some banks are already decreasing savings rates.
Correction, 9:30 p.m.: This story originally contained incorrect information for the amount of interest a five-year CD would accrue at different interest rates. The correct amounts are $217.82 and $276.28 at rates of 4.02% and 5% APY, respectively.
