CD’s May Be the Place to Be Right Now
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 so that’s why they’ll pay a higher yield. However, there are penalties and fees if you withdraw your money early.
CD rates have risen significantly as the result of many rate hikes by The Federal Reserve. There are banks and credit unions paying an APY as high as 5 1/4%. Just a year ago, the national average one-year CD rate was only around 0.3 percent APY (brutal!).
But you better hurry and jump in because yields on CDs are already starting to level off as the Fed slows down on raising interest rates. Yields on maturities longer than one year are unlikely to move higher. One-year and less CDs are still attractive - depending on whether, and by how much, the Fed hikes rates again.
When you invest in a CD, it will continue to grow at the same rate for the duration of the term. Let’s say you deposit $20,000 in a one-year CD yielding 5%. After 12 months you’ve generated $1000 of interest. Not bad.
The Bottom Line
CDs can be useful to save for the short term - 6 to 18 months. Locking up some of your money in a CD can prevent you from dipping into your funds and ensure the money goes to the proper goals you’ve set. One-year CDs yielding 4 -5% APY won’t last forever. This may be an ideal time to visit your local bank or credit union and ask about their CD rates.
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