Lock in high rates: The complete guide to growing your savings with CDs

When you hear “CDs,” you might think of the sleek discs that stored your favorite music in the ’90s. But the acronym also stands for certificate of deposit, which is an investment instrument that lets you lock up funds for a set amount of time in exchange for a fixed rate of return.

CDs are insured by the FDIC up to $250,000 per depositor, per bank and per ownership category. This makes them a relatively low-risk investment option that let you lock in current interest rates long-term. These interest rates are guaranteed for the term of the CD and are not subject to market fluctuations.

CDs are a good option for individuals who have a specific savings goal but do not need the money until a later date. For example, if you’re saving for a down payment on a home or a new car, a CD can provide a low-risk way to earn a fixed rate of return on your savings while you wait to make the purchase.

But CDs aren’t right for everyone. Depending on interest rates and market conditions, they may offer a lower rate of return when compared to other investment options like stocks or mutual funds. Plus, CDs require that you commit to a fixed term, which can be a disadvantage if you need access to your money before the term ends.

Right now, some CDs offer rates of more than 4.5% APY. Locking in these rates can be a good move while inflation is slowing and rate hikes are predicted to end in the near future. To help you determine whether or not CDs are good choice for your financial situation, we’ve compiled a comprehensive guide to everything you need to know about CDs.

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a financial product offered by banks and credit unions where you deposit money for a fixed period in exchange for a a guaranteed interest rate. These rates are often higher than a typical savings account.

At the end of the term, you have the option to withdraw the money and any accrued interest, or you can roll the money over into a new CD. If you withdraw the money before the end of the term, you may incur a penalty.

Certificates of deposit are generally considered low-risk investments because the interest rate is fixed and there is little risk of losing your principal investment. Since the money is tied up for a fixed period of time, CDs are not usually a good place to store money you need immediate access to.

How does putting your money in a CD work?

When you put your money in a CD, you are essentially lending your money to the bank or credit union for a fixed period of time, typically ranging from six months to several years. In exchange for this loan, the bank or credit union pays you a fixed interest rate that’s often higher than on a savings account.

The interest rate on a CD depends on several factors, including the length of the term, the amount of money you are depositing and the current interest rate environment.

Generally, longer-term CDs offer higher interest rates than shorter-term CDs, and larger deposits may earn higher interest rates with some banks. However, current CD rate trends are reversed: The higher rates are applicable to lower terms and vice-versa. This is likely due to higher than usual Federal Funds Rates we’re seeing from the Federal Open Market Committee (FOMC).

When you open a CD, you will be asked to specify the length of the term and the amount of money you want to deposit. The bank or credit union will then calculate the interest rate and provide you with a disclosure statement outlining the CD’s terms and conditions.

Once you open a CD, you cannot withdraw your money until the end of the term without paying a penalty. Some CDs also offer the option to withdraw interest payments without penalty, but this varies by financial institution.

At the end of the term, you have the option to withdraw your money and any accrued interest, or you can roll the money over into a new CD. If you do not take any action, the CD may automatically renew for another term at the prevailing interest rate.

Who should use a CD?

CDs are often used by individuals who have a specific savings goal in mind and want to earn a guaranteed rate of return on their money without the risk of losing their principal investment. They can be useful for people who want to save for a large purchase or for individuals who want to generate passive income.

CDs are also a popular choice for retirees looking for a safe investment that provides a predictable source of income. Because CDs offer a fixed interest rate and a guaranteed return of principal, they are considered a low-risk investment that can help retirees meet their income needs.

Are CDs a good way to invest your money?

Whether a CD is a good way to save money depends on your financial goals and circumstances. Here are some factors to consider when deciding if a CD is a good way to save money.

Interest rates

CDs typically offer higher interest rates than traditional savings accounts. This makes them an attractive option for individuals who want to earn a guaranteed rate of return on their money.

Fixed terms

CDs require you to commit to a fixed term, ranging from a few months to several years. This can be a disadvantage if you need access to your money before the term ends, as withdrawing your funds early may result in penalties. However, this can be an advantage during high interest rate environments as CDs let you lock in a high interest rate if rates drop in the future.

Low risk

CDs are considered low-risk investments, as the FDIC insures them up to certain limits. This means you are guaranteed to receive your principal investment and any accrued interest at the end of the term.

Inflation

Because the interest rate is fixed, it may not keep up with inflation if you open a CD when interest rates are low. In turn, this could erode the value of your savings over time. That said, it’s usually wise to keep some cash on hand, so you might consider a CD or high-yield savings account to at least offset some of the effects of inflation on your cash savings.

What are the best current CD rates?

The best current CD rates go as high as 5.05% for a one-year term and decrease as low as 4.25% for five years. The minimum investment is as low as $1,000 for some of these accounts, making them accessible to a broader client base.

The best offer depends on how long you’re willing to keep your money locked up in a CD. You can opt for a higher rate with a shorter term or guarantee a slightly lower rate for a longer period. You might consider a longer term to lock in a high interest rate for multiple years, even if the interest rate is slightly lower than a short-term CD.

That said, you might consider a shorter term if you’ll need the money within the next year but want to earn more than you would with many savings accounts. As always, run the numbers and see what works best for your financial situation.

Here’s a look at some of the best current CD rates at the time of writing.

U.S. Bank

U.S. Bank currently offers up to 4.55% APY for CDs, with a minimum $1,000 deposit. These aren’t the highest rates, but the terms make this offer unique. While some other banks reserve their highest rates for terms of one, three or five years, U.S. Bank shortens it to seven, 11, 15 or 19 months.

The shorter-term U.S. Bank CDs can be advantageous if you only want to lock up your money in a CD for seven or 11 months. Likewise, the 19-month term is comparable to or higher than longer-term CD’s with other banks listed in this article.

Unfortunately, this U.S. Bank offer is reserved for people residing in specific states. This includes Arizona, Arkansas, California, Colorado, Idaho, Illinois, Indiana, Louisiana, Kansas, Kentucky, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Tennessee, Utah, Washington, Wisconsin and Wyoming.

Earn up to 4.55% APY with a U.S. Bank CD.

Bread Savings

Bread Savings offers some of the highest APYs of any bank with just a one-year commitment. If you want to extend your CD to five years, you’ll enjoy a competitive 4.25% APY while a three-year commitment gets you a 4.5% rate. These are some of the highest rates for relatively short-term CDs. The minimum deposit is just $1,500.

Alliant Credit Union

Alliant Credit Union offers some of the highest APYs on five-year CDs. With just a $1,000 minimum, members can lock in 4.35% APY on a 60-month term. Alliant offers terms as low as three months, plus higher rates on “jumbo” deposits over $75,000.

Related: Looking to build wealth? Here are some of the best ways to invest your money.

Bottom line

If you have a specific savings goal and can commit to a fixed term, a certificate of deposit can be an excellent way to save money. CDs can be particularly useful for individuals who want to earn a higher rate of return on their savings without taking on significant risk.

Right now could be a great time to open a CD, too. Interest rates are currently higher than usual to combat high inflation. However, inflation has shown signs of easing in 2023, and we could see rates fall as a result. Opening a CD now lets you lock in today’s high interest rates for up to five years.

Regardless, it’s important to consider your own financial goals before investing in a CD and to compare rates and terms from multiple institutions before making a decision.

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