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It’s hard to argue against the utility of a certificate of deposit (CD) right now. In today’s high interest rate environment, these accounts are a compelling way to earn a meaningful return on your savings. And, that return can help you increase the value of your savings even in the face of today’s persistent inflation.
But, when you shop for a CD account, you’ll have to make an important decision. You’ll need to decide what term CD you’ll open. There are short-term and long-term options (ranging from a few months to several years) to choose from. And, you’ll need to be OK with locking your money up for the entire term or face potential penalties if you withdraw your money early.
So, which CD term is best? Your unique needs and goals should play a role in that decision. But, there are a few CD terms that you’d be wise to consider right now.
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3 CD account terms to consider now
Each CD term comes with its own benefits and drawbacks. But, there are some terms that you may want to consider based on the current economic and interest rate environment. These include:
6-month CDs
“CDs are a great way to earn fixed and guaranteed interest,” explains Chris Berkel, investment advisor and president of the financial planning firm, AXIS Financial. He says six-month CDs are a strong option for those who “know they’re going to need cash shortly, but not immediately” because they give you “the ability to lock in current interest rates and protect principal.”
And, today’s high interest rate environment makes six-month CDs even more attractive.
“Due to the current interest rate environment, yields are still largely inverted, which means short-term bonds and CDs, like a 6-month CD, pay a higher interest rate than longer term CDs or bonds, like those that mature in 2, 4, 10, and 20 years,” says Berkel.
And, considering the election year and the state of the geopolitical stage, a six-month CD may make sense. “A 6-month CD might make sense for those who are anxious about the geopolitical environment both domestically and abroad,” says Berkel.
Open a six-month CD today.
1-year CDs
If your interest is in earning the highest return possible on your CD, you may want to opt for a 1-year term. In today’s interest rate environment, six-month CDs are offering better returns than long-term options, but one-year CDs are currently paying even more than their six-month counterparts.
For example, two of the top 6-month CDs on the market are offered by Popular Direct and Tab Bank. And, those CDs pay 5.30% and 5.27% APYs, respectively. On the other hand, two of the top one-year CDs on the market are offered by CIBC Bank USA and Limelight Bank. These one-year options pay 5.36% and 5.35% APYs, respectively.
Also, while a one-year CD requires some commitment, you don’t need to lock your money up for years to come to take advantage of one. But, it does allow you to lock in today’s high interest rates for a meaningful period of time, after which the rate climate and broader economy may have stabilized.
5-year CD
Today’s interest rates are historically high. In fact, the federal funds rate, the benchmark CD returns are often based on, is currently at a 23-year high. That’s important because when you open a CD, you typically lock in its return rate for your account’s term.
So, if you’re interested in locking in today’s high returns for the long-term, a five-year CD makes sense. And, opening one now may be a wise idea.
After all, the inflation rate plays a significant role in the federal funds rate. High inflation typically leads to rate hikes while low inflation typically leads to rate cuts. And, inflation cooled in April. With the next inflation report (the report for May) being released on June 12, 2024, it makes sense to lock in today’s strong rates now. After all, if the report shows continued cooling of inflation, interest rates could fall ahead.
Lock in today’s high rates for the long-term with a five-year CD now.
The bottom line
When you open a CD, the term you choose will play a role in the interest you earn and how effectively that CD helps you achieve your financial goals. If you’re in the market for a CD right now, consider a six-month, one-year or five-year term to make the most of your investment. Compare today’s leading CDs now.
