Soaring Interest Rates Make This a Terrible Investment Right Now
- Certificates of deposit (CDs) can be smart when interest rates are falling, but they're a poor choice when rates are rising.
- A high-yield savings account is a better choice for most people right now.
Doing this could cost you big-time in the long run.
Bank account interest rates are finally climbing again, and while that's bad news for borrowers, it's great news for savers. Higher annual percentage yields (APYs) mean you can earn more interest on your cash without doing a thing. But that doesn't mean one account is as good as the next. If you want to maximize your savings, there's one type of bank account you definitely want to stay away from right now.
Now's not the time to lock in your rates
The two main accounts people use for their savings are savings accounts and certificates of deposit (CDs). The two are pretty similar, except for one thing. While savings accounts keep your money fairly liquid and allow withdrawals at any time, CDs lock your money up for anywhere from a few days to several years, depending on the CD term. If you try to take your money out early, you pay a penalty -- usually equal to several months' lost interest.
CDs can be a smart way to lock in a high APY when interest rates are falling, as they did early on in the pandemic. Money kept in savings accounts are at the mercy of changing savings account APYs, but CDs will continue to earn the same rate. That's exactly what makes them the wrong choice right now.
With rates climbing, it's highly likely that CD APYs will also continue to climb over time, so opening one right now will lock you in at a low rate. Say you open a five-year CD with a 2.00% APY right now. But then a year later, the best five-year CDs are offering a 2.75% APY. Now you're stuck earning 2.00% APY for another four years, and you've missed out on a chance to earn even more.
Where to keep your money instead
Savings accounts are the better choice for your funds right now. As APYs rise across all deposit accounts, you'll start to earn more on your savings automatically. Plus, you'll still have free access to your funds whenever you need them.
If you decide to open a CD anyway, there's a few things you can do to reduce your chances of getting stuck with a low rate:
- Stick to short-term CDs: Choose a CD with a term of one year or less. When that year is up, you can reevaluate and decide if you want to keep your funds where they are or move them somewhere else.
- Try a no-penalty CD: No-penalty CDs enable you to withdraw money from your CD before the CD term is up without paying a penalty. Most require you to hold the CD for at least seven days before making a withdrawal and force you to take out all your funds at once if you cash out early. These types of CDs are rare, and the banks that offer them usually have fewer terms available than they do for traditional CDs.
- Look for a step-up or bump-up CD: Step-up CDs automatically increase your APY on a schedule, while bump-up CDs enable you to request one or more rate increases whenever you want if the bank's APYs for new CDs have risen since you first opened yours. These types of CDs are also rare, and they may have a lower starting APY than traditional CDs.
For most people, though, a high-yield savings account will be a better fit right now. Compare a few of the best savings accounts to see which one is the best choice for your savings.
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