KEY POINTS
- Interest rates on certificates of deposit (CDs) are currently at a high level, however, it is anticipated that they will decrease later in the year.
- By investing in a Certificate of Deposit (CD) at this time, you may be able to increase your earnings on savings over the upcoming years when compared to leaving the funds in a savings account.
- There are penalties for withdrawing money early from CDs.
Rates of interest Time deposits Interest rates have been increasing significantly in recent years. However, savings account rates have also been high, which has discouraged individuals from committing their funds to certificates of deposit for extended periods.
However, the situation seems to be shifting. It is anticipated that interest rates on savings accounts and certificates of deposit (CDs) will decrease in the coming months and into 2025 due to a decrease in inflation. This has led some individuals to view it as an opportunity to secure a favorable CD rate before they decrease. Nevertheless, there are several aspects to take into account before making this decision.
The benefits of starting a Certificate of Deposit (CD) at this moment
By opening a Certificate of Deposit (CD) now, you can secure a favorable CD rate that may remain in effect for an extended period. It is likely that you could potentially earn a higher return with a CD over the upcoming years compared to other investment options. A savings account that offers a higher interest rate compared to a standard savings account. If the interest rates on savings accounts decrease significantly.
If you deposited $10,000 in a 1-year CD offering a 5.00% annual percentage yield (APY), you would gain $500 in interest over the year. However, if you had chosen to keep the $10,000 in a savings account, with 5.00% interest for the first month and 4.00% for the subsequent 11 months, you would only end up with approximately $408 in interest for the entire year.
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Currently, short-term certificate of deposit (CD) rates offer the highest annual percentage yields (APYs), which is unusual. While this may appear to be the most attractive choice, the decision ultimately hinges on the duration you are able to keep the funds invested without withdrawal.
For instance, if you were to invest $10,000 in a 1-year Certificate of Deposit (CD) offering a 5.00% Annual Percentage Yield (APY), you would have $10,500 after the first year. Subsequently, if you divided your investment into two additional 1-year CDs with APYs of 4.00% and 3.00%, respectively, after three years, you would accumulate $11,248. Alternatively, had you chosen to invest in a single 3-year CD with a 4.50% APY initially, you would have $11,412 by the end of the three-year period.
The drawbacks of starting a Certificate of Deposit at this moment
One disadvantage of investing in a Certificate of Deposit (CD) is that you are committing your funds for a long duration, often years. While it is possible to withdraw your money before the maturity date, you will incur a penalty for early withdrawal.
An early withdrawal penalty typically does not affect the initial amount you invested (unless you withdraw the funds very soon after opening the CD). However, you will earn significantly less interest than if you had kept the money in the CD until it matures. Therefore, it is important to select the duration of your CD wisely if you opt for this approach.
CDs may not be a suitable option for individuals who do not intend to access their funds for an extended period. In such cases, these individuals might find greater returns on their savings by choosing alternative investment options. investing it Instead of storing it on a CD, it is worth noting that even the most competitive CD interest rates usually do not outperform the inflation rate. This means that your purchasing power may decrease even as the dollar amount in your account grows.
If you believe a CD is not suitable for you, you may want to transfer your long-term savings to a retirement account or a taxable brokerage account, and leave the remaining amount in a high-interest savings account. While the interest rate in your savings account may vary, you will have the flexibility to withdraw the money whenever necessary.
