After doing really well last year, the stock market isn’t doing so great at the beginning of 2024. Because of this, some investors are exploring other options, like certificates of deposit, or CDs.
A CD is a special kind of savings account that gives you a fixed interest rate for a set amount of time. But if you take out your money before the agreed-upon date, you’ll have to pay a penalty.
CDs have been making investors a lot of money lately because the Federal Reserve has been raising interest rates a lot. Experts told that this has made CDs more attractive than they have been in a long time.
They also mentioned that since the Fed plans to lower interest rates this year, people interested in making money should act fast before the potential profits go down.
Happe continued, “Investors should definitely keep a potential rate cut in mind,” pointing out that some forecasts anticipate a rate cut from the Fed in the coming months.
However, experts point out that CDs have their drawbacks. The fixed interest rate they offer means you won’t experience large gains, unlike riskier options like the stock market.
For a one-year CD, the best available interest rate is 5.66%, according to WalletHub‘s list of rates. Even for the shortest term, three months, you can still get up to 5.55% interest, as per WalletHub.
When the Federal Reserve raises interest rates, it benefits CDs. This is because the adjustments allow banks to charge borrowers higher loan costs, explains Reena Aggarwal, a finance professor and director of the Georgetown Psaros Center for Financial Markets and Policy.
“When interest rates are high, banks can make a loan — for example, a mortgage — at a higher rate,” Aggarwal stated. “So they can afford to pay their depositors more.”
When banks increase the interest rates on savings accounts, like CDs, they attract customers to put their money in those accounts rather than in a competitor’s. This helps the bank have more money available, which they can then use to make more profits by giving out more loans, according to Aggarwal.
“It’s all about competition,” she further added.
According to Columbia University Business School finance expert Yiming Ma, one of the main advantages of CDs is the unwavering predictability of their returns.
“You’re guaranteed your money,” Ma stated.
Nonetheless, experts noted that the market already provides better returns on short-term CDs than on long-term ones, partly due to projections that interest rates will decline gradually over the next several years. They said that this dynamic gives investors a somewhat uncommon chance to realize high returns quickly.
According to Ken Tumin, a senior industry analyst for savings at online lender LendingTree, “This adds to the attractiveness of a short-term CD.“
Tumin stated that “a long-term CD would be beneficial if rates do fall,” but added that investors who acted early would be tied into the high fixed rates for a number of years.
Although CDs provide benefits, investors should be mindful of important trade-offs, according to experts.
