Why You Should Consider A Certificate Of Deposit In 2024
Now is a great time to open a CD
Have you considered investing in a certificate of deposit (CD)? Well right now, rates for Certificates of Deposits in early 2024 are the highest they’ve been in years.
According to Bankrate, you can find six-month and twelve-month CDs with an annual percentage yield of around 5.5%. Additionally, three-year and five-year CDs also currently have high rate offerings of between 4.6% and 4.75%.
Based on this, the beginning of 2024 is a great time to open a CD and lock in a rate, as interest rates are expected to drop in the near future based on various forecasts around the Federal Reserve interest rates and market expectations.
Many consumers have shied away from CDs over the past years as high yield savings account rates have been comparable. Currently many high-yield savings accounts are offering interest rates between 4.0% and 4.5%. However, these rates can fluctuate with Fed rate changes while CDs lock in rates that remain through the term of the CD.
That said, here’s what you need to know about investing in CDs and how to open an account. But first, let’s talk about what Certificates of Deposit are, if you are unsure or need a refresher.
What are CDs?
CDs are account types provided by banks or credit unions that can be used to save and earn interest on your money. The interest is tied to a fixed timeframe and a fixed interest rate and in order to earn the interest, you agree to leave the funds in the account for a specific period of time.
The most common CD terms are as follows:
CD terms under one year e.g. three, six, or nine month terms
CD terms over one year e.g. anywhere from 12 months to 5 years (or more)
If you withdraw your money before the agreed-upon time limit, you will have to pay a fee which is typically some or all of the interest your money has earned.
Are CDs right for your savings plans?
While high-interest rates are an excellent reason to open a CD, it may or may not be the right choice, depending on your financial needs.
Pros of a CD
Basically, if you are saving for a long-term purchase, such as a down saving for college in four years or buying a new car in two years, then CDs can be a good option as you’ll have a guaranteed interest rate once you are locked in your CD.
CDs can also help you break the habit of constantly dipping into your savings to spend money due to the penalty involved for early withdrawal.
Cons of a CD
Although CDs are considered somewhat liquid investments, if you want to be able to access your savings whenever you need to, they may not be the best option as you may be liable for a fee or lose some or all of the interest earned.
When compared to the average rate of return from investing long-term in the stock market, CDs returns are lower, so they are best suited for goals you want to accomplish in five years or less.
How to choose the right type of CD
There are many different types of CDs to consider. Here are a few to keep in mind:
Standard/traditional CD
This is the most common type of CD where your funds are tied to a specific interest rate and specific time period. This type of CD typically has a fee/penalty if your withdraw your CD before the time period elapses.
No penalty CD
If you pull your funds out before the term, you won’t have to pay a fee, but you’ll likely face lower interest rates for the convenience of not having a penalty.
Add-on CD
With an add-on CD the financial institution permits you to make regular contributions to your CD. Again for this convenience, you may earn a lower interest rate.
Jumbo CD
A jumbo CD provides the opportunity to securely invest a large amount, exceeding $100,000. The the pro to this type of CD is the opportunity to earn a higher interest rate than a standard CD.
How to open a CD account?
If you are considering investing in CDs, now is a great time to open an one give current interest rates right now in 2024 (at the time of this writing).
Here’s how to find an account that’s right for you!
Step 1: Decide on the term and provider of your CD
How long do you want to keep your money in your CD? Remember to consider when you’ll need the money and how much interest you want to earn.
To help you make the right decision, consider your financial goals.
Once you know the time length, do some research before choosing a financial institution. Consider if you want to work with a physical bank, online bank, or credit union.
Additionally, look out for any additional fees or minimum requirements certain institutions may have.
Some places you can research current CD rates and terms include (Direct links to CD rate pages below):
Step 2: Choose how to apply
Different institutes may have different requirements, but you can usually apply online or in person. Applying online tends to be a shorter process.
Step 3: Decide on how you want your interest distributed
You may have the option to receive your interest at the end of your term or through installment payments throughout the term.
That said, regardless of what you choose (if you have the option), you’ll receive your initial deposit plus your earned interest at the end of the term.
Step 4: Make a deposit
With most CDs, you will make a one-time payment into the account and leave the money untouched. The exception to this is with Add-on CDs (as discussed above).
Depending on the institution, you can deposit your money through a bank transfer, or by mailing or depositing a check.
While there is a lot of encouragement to invest in CDs right now, remember not to rush into this process if you’re unsure. Take your time and do your research. However, if you are ready to invest in CDs, now is the perfect time.
If you need extra motivation and clever tactics on your savings journey, check out our FREE financial courses.