Don't Ever Buy a CD Without Answering These 3 Questions
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So you're thinking of buying a certificate of deposit (CD). That could be a great choice. CDs are offering impressive yields right now. But before you jump in, take the time to answer these three very important questions first.
1. Can I afford to tie up the money?
CDs require you to commit to investing for a period of time, referred to as a term. You have lots of choices when it comes to the term. You could opt for a short-term investment, such as a 3-month CD or a 6-month CD. Or you could opt for a longer-term investment, like a 5-year CD.
But whatever term you pick, you need to be sure you're OK with leaving your money invested for the whole time required. Otherwise, you get hit with early withdrawal penalties. Consider whether there's any scenario you might need to take the money out before your CD matures. If there is, then pass up on purchasing that CD.
2. Am I getting the best rate?
The national average CD interest rates are pretty low right now. The FDIC reports the national average rate on a 3-month CD is just 1.53%. On 60-month CDs, it's only 1.40%. This is not impressive.
But there are tons of high-yield CDs that beat the national average by a lot. In fact, The Ascent's list of the best CD rates has tons of options above 5.00%, with some as high as 5.15%. Obviously, this suggests there's a lot of variation in the offers out there.
Since it makes sense to try to maximize your yields, you shouldn't buy any CDs until you look at the options available and find the best rate you can. Check different offers from online banks and credit unions to confirm the yields on the CD you're signing up for are very competitive before you make your purchase.
3. What CD term is right for me?
As mentioned above, CDs have different term lengths. So you shouldn't buy one until you decide which term length makes sense for you.
Obviously, you can't buy a CD with a term that lasts longer than the time you can afford to lock up your money. But that's not the only consideration. You would be better off buying a CD with a shorter term if you think interest rates could go up soon. But you would be better off buying one with a longer term if you think rates will fall and you want to lock in today's great rates.
Take the time to think about what you believe is going to happen in the CD market to pick the right term. Most experts believe rates are going to fall soon. That's because the Federal Reserve repeatedly raised them in 2022 and 2023 to combat inflation, which is slowly getting more under control than it was during the COVID-19 pandemic. The Federal Reserve has signaled that it's hoping to cut rates once the country makes more sustainable progress on inflation. If you believe the experts are right, buying a longer-term CD could make sense. But do a little research on market conditions and predictions before jumping in.
If you answer these three questions, you should be able to find the right CD for you. Not considering these factors could lead to making a costly mistake you end up regretting.
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