Certificates of deposit (CDs) have been making a comeback in recent months. After years of meager interest rates that hit an all-time low only a little more than a year ago, their rates are once again rising—even beating those of high-yield savings accounts that often require larger investments. And recent stock market volatility coupled with high rates of inflation are leading many consumers to prefer less risky methods of saving, while still banking on earning interest on those funds. If you’ve shied away from CDs in the past, but wonder if they might be the right fit for your current savings needs, now is the perfect time to try one out.
Certificates of deposit are a little different from other savings and investment accounts. Like bonds, they have more stringent requirements: the length of time required for investing is set right from the beginning, and during this time the funds are off-limits to withdrawals, as well as deposits. But if you are able to work within these parameters, they could be the right savings tool for your savings goals. Keep reading to learn more about the ins and outs of investing with certificates of deposit!
Why Invest in a CD Now?
If you’ve seen headlines about rising interest rates, you might immediately think about the recent increases for mortgages. But what many people don’t realize is that the reverse of the Federal Reserve raising its rates is that interest paid by banks, like that for certificates of deposit, is also on the rise. In fact, as this graph of CD rate caps illustrates, interest rates for certificates of deposit have risen considerably since last January.
On the other hand, returns for the stock market have diminished in the same period—down about 24% since last year. While stocks and stock-market based funds are still ideal for long-term investment, for short and medium-term savings, certificates of deposit can make a lot of sense. And with today’s market, they are more helpful than ever as part of a diversified savings strategy.
How do Certificates of Deposit Work?
Certificates of deposit allow savers to earn a guaranteed rate of interest in exchange for agreeing to leave their funds in the CD account for a given term. Typically, the more you have to invest, the higher the interest rate, with the best CD rates also associated with longer savings terms. How long does a certificate of deposit last? You can choose your term length from a number of options, which can be as short as a few months to as long as several years. You won’t have access your money until the CD reaches the end of its term, if you want to get those returns. Early withdrawals will result in a penalty—usually a full or partial loss of interest, or a fee.
Once a certificate of deposit reaches maturity, you can withdraw the full value of the investment, or choose to renew it. Renewing allows the CD to build more compound interest, and thus increase returns for the investor. If you do nothing, CDs often automatically renew for the same term length, at the current interest rate (which could be higher or lower).
Certificates of Deposit vs. Savings Accounts
Unlike certificates of deposit, savings accounts are more liquid. Usually, there are few restrictions on withdrawals from traditional savings accounts, which makes it relatively easy to transfer funds to different accounts or access them for spending. But because their accessibility makes them a less reliable source of funds for banks, typical savings accounts normally have much lower interest rates than CDs can offer (though many banks offer special, high-yield options that tend to have more restrictions or requirements).
Savings accounts and CDs generally have different preferred uses. Saving accounts are great places to accumulate funds apart from your usual spending accounts. You can regularly transfer set amounts of money from other bank accounts, contribute gift funds (for yourself or your child), or split off a portion of your direct deposit pay into a savings account to grow your nest egg—possibly without even noticing it. But if you are looking for a return on your savings, to keep up with inflation or grow your wealth, moving some of those savings to a CD might make sense as part of a larger saving and investment strategy. CDs not only offer higher interest, but because they are even less accessible than savings accounts, you will be less likely to spend them down, giving them an even greater chance to grow.
When Should I Open a CD Account?
Certificates of deposit can be useful for just about anyone—for certain saving situations. Ideal times to utilize a CD include when you have a short or medium-term savings goal, when you want to take advantage of higher interest rates, or when you are looking to grow your funds without the risks associated with other forms of investment, like stocks.
Because their lengths tend to fall in the range of a few months to a few years, CD accounts are great options for short or medium-term savings goals. And because you choose your term lengths, they are ideal products to use for your specific savings plans. For instance, if you would like to save money for your child’s college that is two years off, you could set aside a chunk of your funds in a CD, while you continue to save in other accounts. Alternatively, if you are saving to purchase a home in a few years, you can put your current funds in a CD that will mature right in time.
Certificates of deposit are also useful tools for simply building your nest egg. Rather than let unneeded money wallow in a low-interest savings account, putting your extra cash in a CD is a great way to let it grow, especially when rates are as competitive as they are today. Their guaranteed returns offer an added layer of stability over stock-market based investments, and you’ll know exactly how much your investment will be worth and when, from day one.
However, CDs aren’t the best choice for savings tools in all scenarios. While CDs are great for short and mid-length savings goals, you’ll lose those earnings if you need those funds sooner and have to withdraw from your CD before it reaches maturity. If accessibility is important, choose a regular or high-yield savings or checking account instead. And if you’re seeking potentially greater returns over a longer span of time (like investing for future retirement), then CDs probably aren’t the best option either. Specialized retirement accounts like IRAs and 401(k)s have tax-advantages and larger returns over time. But even if either of these scenarios applies to you, consider that some kind of CD may fit into your overall financial plan, whether you choose a very short-term CD or smaller CD, or simply put some money aside as a supplemental investment.
Ready to Open a CD?
If you’re interested in taking advantage of rising rates for certificates of deposit in South Central Illinois, Dieterich Bank has many options available—no matter how much or how long you’re looking to invest. With our competitive current CD rates for terms from as short as seven days to as long as 60 months, you’re sure to find something that is right for you and your wallet.
*Minimum opening balance and minimum to obtain disclosed APY is $25,000. The 7-month CD will automatically renew into a 6-month CD at maturity. Withdrawals may reduce earnings and are subject to early withdrawal penalties. Interest compounded monthly. 7-Month CD Special expires on October 31, 2023.