CD Rates Are on the Rise. Should You Buy Some Now?

Certificates of deposit (CDs) have made a major comeback this year. Whether you were a fan of fixed-income investments before, it's hard to ignore them now, what with top-paying CDs earning at least a 5% APY. This past August, in fact, one credit union even boasted a 7.19% APY on a 7-month CD. That's getting close to the average annual growth rate on the S&P 500 index over the last 30 years -- about 10.7%, not counting 2023 -- on a bank product with few of the same risks.

All this CD craze may have you wondering if now is the time to invest in them. From a certain perspective, yes, now is the best time in over two decades to invest in CDs. But that doesn't mean CDs will be right for you. With that in mind, let's look at the pros and cons of CDs, as well as some ways to buy them.

Why CDs are a strong financial product

CDs are uber-safe places to store savings, and they have none of the volatility of stocks or mutual funds. In fact, CDs appeal to many investors and retirement savers simply because they guarantee you'll earn money at a fixed rate over the duration of your CD term. If your CD has a term of two years and a 5% APY, then you'll earn 5% on your money for two years -- no matter what happens to CD rates over those two years.

Combine this security with today's top-paying CD rates, and you have a compelling financial product. In fact, if you're really passionate about earning the most interest, you could build a CD ladder. This would involve investing in different short- and long-term CDs -- "rungs" -- with varying maturity dates. The idea is that you can earn interest broadly across your money while also ensuring you're never too far from a CD maturing.

For instance, if you had $20,000 to invest, you could split your money like this:

• $4,000 in a 3-month CD
• $4,000 in a 6-month CD
• $4,000 in a 1-year CD
• $4,000 in an 18-month CD
• $4,000 in a 2-year CD

When the 3-month CD reaches maturity, you could reinvest the money in another CD, creating another rung on your ladder. Or, if a more lucrative opportunity presents itself, you could invest in that. Either way, a CD ladder lets you access portions of your savings early and make choices that could boost your overall earnings.

Why you should be cautious about CDs

CDs are great for money you won't need for the near term. But they're not the same as savings accounts, and they won't let you withdraw money easily.

In fact, most CDs have early withdrawal penalties to discourage you from pulling out your money too early. These penalties can range from paying three months of earned interest to as much as 12 months or higher. And yes -- you could pay three months' worth of interest even if you haven't had the CD for three months. That would result in a loss, and this issue is one of a CD's major drawbacks.

How to buy CDs

If you're sure a CD is the right product for you, take a look at today's top-paying CDs. Look closely at the fine print and understand conditions like minimum deposits, early withdrawal penalties, and what happens to your money when the CD matures. You'll then need to create an account with the CD provider, which will involve verifying your identity and making an initial deposit.

All in all, now is a great time to buy CDs. While the Federal Reserve could push interest rates even higher, it likely won't push them so high as to eclipse today's top-paying CDs. Take a look for yourself and see if it's worth locking up a portion of your savings in exchange for a high APY.