Are CDs a Better Bet Now That Interest Rates Are Rising?

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield

KEY POINTS

  • CD rates are rising now that the Federal Reserve is hiking up interest rates.
  • While you may be tempted to open a CD, there may be a better home for your money.

CDs may be paying more than they did last year, but that doesn't mean they're the right place for your money.

The Federal Reserve has been raising interest rates this year in an effort to slow the pace of inflation. That's making borrowing more expensive across the board. But it's also making it so that banks are paying savers more generously.

If you take a look at your savings account today, you may notice that the interest rate you're getting on your money is higher than what you were getting earlier on in the year. Similarly, certificates of deposit, or CDs, are now paying more interest, so if you have money you don't need immediately, you may be inclined to open one.

But are CDs really such a good bet right now? Here's why they may -- and may not -- be.

Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards

The upside of opening a CD

When you put money into a CD, your principal is protected. Deposit $5,000 into a one-year CD and leave that money alone for 12 months, and after a year, you're guaranteed to get your $5,000 back, plus interest. Plus, CDs commonly pay more interest than savings accounts, so if you're going to keep money in the bank, it could pay to put it somewhere it will earn more.

The downside of opening a CD

With a CD, you commit to keeping your money locked up for a preset period of time. Cashing out a CD early means losing money -- usually, a few months' worth of interest -- as a penalty, whereas with a regular savings account, you can take a penalty-free withdrawal at any time.

Similarly, when you put money into a brokerage account, that money isn't restricted. You have the option to cash out investments at any time without penalty. Just as importantly, with a brokerage account, you might earn a much higher return on your money than what a CD will pay you -- even with today's CD rates being higher.

Where should you put your money?

If you're not sure if a CD is right for you, ask yourself some questions:

  • Is this money I expect to need within five years? If so, a CD may be a better bet than a brokerage account, because your principal is protected. If you have cash earmarked for a shorter-term goal, like buying a house, then you may want to avoid investing it. 
  • Am I comfortable with the idea of investing? For some people, investing money means losing sleep at night. If that sounds like you, you may want to stick to a CD for now and take some time to grow your investing knowledge.
  • Do I have a full emergency fund? Some people will tell you a CD is a fine place to put your emergency savings. In reality, you should really stick to a regular savings account, because if an emergency strikes and you need to access that money, you don't want to have to deal with penalties. 

Although CDs are now a more attractive bet in light of higher interest rates, they may not be the best place to keep your money. Make sure to walk through different options before tying your cash up in a CD -- especially a longer-term one.

These savings accounts are FDIC insured and could earn you 11x your bank

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.

Two of our top online savings account picks:

Rates as of Apr 12, 2024 Ratings Methodology
Advertisement
SoFi Checking and Savings Western Alliance Bank High-Yield Savings Premier
Member FDIC. Member FDIC.
Rating image, 4.75 out of 5 stars.
4.75/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair
= Poor
Rating image, 4.50 out of 5 stars.
4.50/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair
= Poor

APY: up to 4.60%

APY: 5.36%

Min. to earn APY: $0

Min. to earn APY: $0.01

Our Research Expert

Related Articles

View All Articles Learn More Link Arrow