I have a confession to make: until fairly recently, I didn't see the point of investing in certificates of deposit (CDs). Over the years, I've written lots of articles about CDs and I understand how they work. But I felt like CDs didn't have a place in my portfolio.
That's because, for the past several years while interest rates were low, lots of banks were paying ridiculously low APYs on CDs. (Even now, as of February 2024, some big banks are still paying only 0.01% APY on standard CDs.) What's the point of opening a CD if you have to: 1.) Lock up your money, and 2.) Not earn any yield?
But now that interest rates are higher and some of the best CD rates are 5.00% APY and above, I'm starting to see the appeal of CDs. If your financial goals are a good fit for committing your money to a CD, opening a CD in 2024 could give you an attractive APY and a safe place to let your savings grow.
Let's see why CDs could be the "comeback kid" of banking products in 2024.
1. Interest rates might not be this high again
Trying to time the stock market is risky and often does not work. No one knows exactly what is going to happen in the future for any given stock, industry, or for the global economy. However, many economists and investing experts believe that the Fed is going to cut interest rates in 2024. These possible interest rate cuts might not happen in March 2024 or May 2024, but they could happen.
And if the Fed does cut interest rates, that means today's best CD rates might be as high as they are going to get for the foreseeable future. Opening a CD today could help you get the highest possible APY on your savings.
For example, the best high-yield savings account based on The Ascent's research is offering 5.32% APY. But the best 1-year CD is offering 5.35% APY. That means the best CD will pay you an extra 0.03% APY on your savings compared to the best savings account.
If interest rates go down by the end of 2024, savings account APYs will go down too. But if your money is in a CD, you will earn the same fixed rate of interest that your CD term promises, even if the Fed cuts interest rates. CDs can protect your savings against possible interest rate cuts.
2. CDs are a safe investment with FDIC insurance
CDs are generally considered to be one of the safest investments. If you put your money into a CD with an FDIC-insured bank (or NCUA-insured credit union), you get the protection of federal deposit insurance on up to $250,000 per qualifying account. This means that even if your bank fails, you will still get your money back.
All the best CDs recommended by The Ascent are with federally-insured banks and credit unions. If you're concerned about recent bank failures, stock market volatility, or instability in the global economy, CDs can give you peace of mind.
3. CDs let you lock in a high APY for years
When you buy a CD, you commit your money for a certain period of time, or "term." The best CD rates tend to be higher than the best high-yield savings account APYs, because the bank is paying you extra for committing your money to the CD. Especially if the Fed cuts interest rates, locking in a good APY on a longer-term CD could be a smart investment.
For example, as of today, the best 3-year CDs were paying 4.45% APY. Let's assume that in the hypothetical near-future, the Fed decides to cut interest rates by 1%. That would mean that after the 1% rate cuts, the best savings accounts might only be paying 4.32% APY. Locking in a 4.45% APY on a 3-year CD today could let you earn more yield on your savings -- guaranteed for three years -- than the best savings accounts might offer in the case of future interest rate cuts.
Bottom line
I still probably won't open any CDs in 2024, because I would rather keep my cash in a high-yield savings account. But if you want to earn the highest possible yield on your savings, and you're not afraid to commit your money to a bank for a specific term of time, investing in CDs could be a smart move. Certificates of deposit are worth considering in 2024.
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