Image source: Getty Images
In November of 2023, more than 3,900 certificates of deposit (CDs) were available with rates above 5.00%. By March of 2024, that number had dropped under 3,000, as reported by MarketWatch.
There’s no question that CD rates on the whole have come down a bit from recent record highs, although there are still great offers out there. While it’s impossible to predict the future, this trend is probably going to continue or even accelerate, as the Federal Reserve has still signaled a desire to lower interest rates this year if inflation slows.
So, should you rush to buy 5.00% CDs before they disappear? Here’s what to know.
Here’s the reality: CDs are a good investment only in very specific situations. Opening one makes sense if:
You can afford to tie up your money for as long the CD term lastsYou don’t have a long enough investing timeline that your money belongs in the stock market
If this criteria doesn’t apply to you, then it doesn’t matter if you lose the chance to buy a CD at 5.00% because it wasn’t the right investment for you anyway.
There’s been a lot of attention lately focused on buying CDs because yields have been pretty impressive — especially considering a good rate on a CD used to be around 2.00%. But you don’t want to let fear of missing out drive you to make the wrong investment choice when a CD really isn’t the best option for you.
If you’re not able to commit to investing your money for the term of the CD, it makes little or no sense to invest in it.
You’ll be charged a hefty penalty if you have to withdraw the funds early, sometimes losing most or all of the interest you’ve earned. And if you have to take money out before you earn enough interest to cover the penalty, you could actually end up losing some of the principal you put into the CD.
On the flip side, if you have money you can invest for the long term (around five years or more), you are almost always better off opening a brokerage account and putting the money into the stock market. You can buy shares of an S&P 500 index fund that has consistently earned 10% average annual returns (double what CDs are offering right now), and take on minimal risk, since your timeline is long enough to wait out market downturns before you’d have to sell.
Now, if you happen to have money available that you can lock up for a few months or a few years, you may want to act sooner rather than later and open a CD. Rates probably aren’t going to go up since the Federal Reserve is still signaling an intent to cut rates. Taking a chance by putting off your purchase would mean taking a big risk with little potential upside.
If that’s your situation, check out The Ascent’s guide to the best CD rates to find one that’s offering a competitive yield. Consider buying it soon, unless you have a solid reason to believe the experts are wrong on which way rates will trend in the coming months.
Just be sure, though, that you’re really considering whether a CD is the absolute best place for your investment dollars by thinking first about exactly how long you can afford to tie up your cash.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
—
Blog powered by G6
Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.
For any inquiries, please contact [email protected]
