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Do high interest rates, sky-high grocery prices, and expensive trips to the pump have you groaning? Put the high rates to work for you with Certificates of Deposit (CDs). Having reached a 3-year high this year, these rates could make now the perfect time to maximize your money’s growth in a secure savings vehicle. Then again, it may not be! We have some insights and thoughts to help you decide.
What Are CDs and Why Are Rates Rising?
Certificates of Deposit (CDs) are a type of savings account that offers a fixed interest rate and a fixed maturity date (The date at which you can withdraw money from the account). In exchange for keeping your money untouched for a predetermined amount of time (months or years), you earn an interest rate that is higher than that of traditional savings accounts.
Over the past year or so, these interest rates have risen steadily, due primarily to the Federal Reserve’s consistent increase in interest rates (an attempt to curb inflation). When the Federal Reserve raises interest rates, banks often follow by increasing CD rates to attract more deposits. These higher interest rates are good news for people like you, who can earn more money off your investment.
Exactly how high can these interest rates get? During the current rise, investors have locked in rates that in some cases have exceeded 5 percent, making now an appealing time to consider depositing your own money in this savings vehicle.
How do rising CD rates affect you?
Increased Returns
Higher CD rates translate into bigger returns on your investment. For conservative investors seeking low-risk options, CDs can be particularly attractive. By locking in a higher rate now, you stand to earn more interest compared to what was available in previous years.
Inflation Hedge
With ongoing inflationary concerns, higher CD rates can help protect your savings from the eroding effects of rising prices. Since CDs are a low-risk investment, they offer a stable way to grow your money and maintain purchasing power.
Why invest in CDs?
More returns and a way to protect against inflation are appealing reasons to invest in a CD. Before committing your money, though, take the time to think through some of these factors:
Timing
No matter how high CD interest rates may be, they will not do you any good if you cannot keep your funds in the CD until maturity. Before committing to one, make sure you can invest the time needed to wait until your funds are available.
Options
In addition to CDs, consider comparing rates with other savings and investment options, such as high-yield savings accounts or short-term bonds. Each option has its own benefits and risks, so understanding these can help you choose the best fit for your financial situation.
Flexibility and Accessibility
While CDs offer higher interest rates, they generally require that funds remain untouched until maturity. If you anticipate needing access to your money before the CD term ends, exploring options with more flexibility, such as savings accounts or money market accounts, might be beneficial.
Potential for Penalties
Early withdrawal from a CD before its maturity date can result in penalties that might negate the benefits of higher interest rates. Understanding the terms and conditions of your CD, including any early withdrawal penalties, can help you avoid unexpected costs.
Is now the right time to invest in CDs?
Whether now is the right time to invest in CDs depends on various factors, including your financial goals, current interest rates, and more. With CD rates on the rise, locking in a higher rate could be advantageous, but it’s also important to consider the potential for future rate changes and how they might impact your investment strategy.
One factor to immediately consider is the potential rate change that could accompany the next meeting of the Federal Reserve. Interest rates could start dropping after that meeting, meaning you need to act quickly to lock in the highest possible CD interest rates.
For personalized advice tailored to your specific financial needs, consider consulting a financial advisor. At Bank of South Texas, our experts are here to help you navigate the current CD rate landscape and develop a strategy that works for you.