Many certificates of deposit (CDs) are currently offering rates above 5%. While you can still find tons of options out there if you’re looking to earn these competitive yields, you have a smaller selection than you did just a few months ago.
In fact, you had a choice of more than 3,900 CDs with rates equal to or above 5% in November of 2023 — but you were down to only around 3,000 by March of this year. That’s a pretty big decrease. And it’s likely this trend is going to continue for the foreseeable future because the Federal Reserve has strongly signaled it intends to lower interest rates as soon as inflation numbers look more sustainable. Most experts think that will happen this year.
Although there’s every reason to believe those very high yields will soon be a thing of the past, I’m not rushing into opening CDs. Here’s why.
1. There are still better long-term investments available
One of the biggest reasons I’m not jumping to buy CDs is because there are better investments out there. Specifically, I have a lot of money in S&P 500 funds, which provide average annual returns of 10% and have very low fees. I’m adding to those funds instead of opening a CD because I’d rather have the chance to get the better long-term rate.
Obviously, choosing a 10% investment over a 5% investment would be an easy decision if everything else about the investments was the same. That’s not the case, though. CDs present almost no risk, as they are FDIC-insured (although you do risk penalties if you must withdraw funds early). The S&P 500 presents some risk since it’s an investment in the stock market.
However, the chances of losing money in an S&P fund are very small if you have a long enough investing timeline. This investment (made up of stock shares in around 500 large U.S. companies) has some up years and some down years. But over time, its value is very consistent. So if you can invest for at least five years, your risk is minimal.
I’m a long way from retirement or other big long-term goals like paying for my kids’ college. And I already have an emergency fund and other savings accounts for short-term goals, so I can afford to put my extra cash into the market. There’s no reason to change that approach to get a CD, even if rates are higher than they’ve historically been. They’re still lower than what I can earn elsewhere.
If you have an investing timeline of five years or more, your money also belongs in the market instead of a CD. Don’t get swayed into accepting lower returns just because the CD rates are better than they’ve been in the past.
2. I don’t want to lock up money I might need
As I mentioned above, I do have some money in savings that I could theoretically move to a CD. The big benefit of that is I’d be able to lock in today’s competitive yields so if rates went down, I’d still get a guaranteed generous return.
Unfortunately, there’s an even bigger downside: I’d have to commit to leaving my money invested for the duration of the CD or face penalty fees. Since most of the money I have in savings is my emergency fund, my car repair fund, or money earmarked for upcoming vacations, I can’t afford to give up my access to it.
If you think you might need your money soon, don’t give it to a bank for months or even years, even if it’ll pay you 5% for doing it.
3. I don’t want to act because of FOMO
I’ve been really tempted to start buying CDs because there’s a lot of news emphasizing how great the current rates are. But just because this particular investment happens to be doing better than usual right now, that doesn’t mean it’s time to jump on the bandwagon.
You need to consider not whether CDs are a good buy right now, but whether they’re a good buy for you. If they aren’t, it doesn’t matter if rates are 5% or even higher. You shouldn’t buy them just because of fear of missing out on the opportunity if they don’t fit your goals and investing timeline.
4. No one can predict the future of CD rates
The last big reason I’m not rushing to act is because no one can say with certainty whether the 5% rates will disappear soon or not. Most experts predicted the Federal Reserve would lower rates multiple times in 2024; that hasn’t happened yet and may not happen any time soon because inflation is still higher than the central bank’s benchmark rate.
The fact that experts were wrong means they very well may be wrong about whether CD rates will go down in the coming months. Yields could stay above 5% for quite a while, so there may be no reason to rush. If I change my mind later, I may still be able to get a CD offering the same or better rates as those available now. And if I don’t, that’s OK, too — because my money is where it needs to be right now.
CDs may make sense for you if you have money to invest for five years or less that you definitely won’t need for a while. They could also be a good idea if you’re adding CDs to your portfolio because doing so is part of your overall investment strategy rather than just because rates happen to be high right now.
If that’s not the case, pass up on CDs and keep your money in savings or a brokerage account instead.
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