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MoneyWatch: Managing Your Money
By Ben Geier
Edited By Matt Richardson
/ CBS News
There are many options available for those looking to save money. From high-yield savings accounts to tax-advantaged retirement accounts (such as a 401(k) plan or an individual retirement account (IRA), there are plenty of places to stash money for use later in life. One option that is especially attractive right now is to use a certificate of deposit (CD). Rates on these accounts are very high right now, meaning your money can earn you a lot of interest with virtually no risk.
Long-term CDs can be a bit scary – you are locking your money into an account for many years. With rates as high as they are right now, though, locking in that high return can pay off over time. A $10,000 deposit, for example, could earn significant sums of money before the term expires.
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Why you should deposit $10,000 into a 5-year CD now
Putting $10,000 into a 5-year CD can be a part of a potentially very successful savings plan. There are several reasons why right now is a good time to make a big investment in a long-term CD.
Rates are high right now
As noted above, CD rates are especially high right now. Currently, you can get an interest rate of up to 4.75% on a 5-year CD. It's important to note that these high interest rates are generally available at online only savings institutions. Traditional banks have higher overhead costs than online only institutions – think rent, salary for workers in brick-and-mortar locations and general upkeep - thus usually preventing them offering higher returns.
Rates are high right now mostly as a response to the Federal Reserve having raised federal lending rates repeatedly over the past 18 months. The Fed took these actions in an attempt to curb inflation. While there has been some success, inflation still hasn't gotten down to an acceptable level for the Fed, so rates remain high – and thus banks are still offering high rates to CD borrowers.
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5-year CDs will remain steady even if the rate environment changes
Normally, long-term CDs have higher rates than shorter-term options. Right now, though 1-year CDs are actually offering higher rates, which could lead you to think buying a shorter-term option is a better idea.
The issue, though, is that rates will lgo down eventually. Sooner or later, the Fed will lower federal rates and CD rates will likely follow suit. If you only pick a 1-year CD and rates go down during that time, you won't be able to get that rate again if you want to put money into a CD again when the term is up.
With a 5-year CD, on the other hand, your rate is locked in for years. If the Fed cuts rates drastically one year into the term of your CD and the bank you use starts offering significantly lower rates on CDs, it doesn't matter to you. Your rate is locked in, and you will earn that interest until the end of the CD's term.
The interest is significant and predictable
If you're considering saving with a CD, you can know exactly how much interest you will earn over the course of the contract. Let's say you put $10,000 into a 5-year CD with the rate discussed above – 4.75%. After the 5-year term is up you'll have earned $2,611 in interest for a total account balance of $12,611.
That is a good rate of return for an option that comes with essentially zero risk. You can't lose money in a CD, and the FDIC insures up to $250,000 in each CD account. You could potentially earn more with an option like investing in a mutual fund, but those come with the risk of investment loss.
The bottom line
If you put $10,000 in a 5-year CD right now, you'd earn more than $2,600 in interest by the end of the term. That's a significant bit of interest, and what's better is that it comes with virtually no risk. Using a 5-year CD right now would also mean locking in interest rates at a time when they are very high, while shorter-term options would leave you potentially opening a new CD with a much smaller rate later on.
Ben Geier
Ben Geier is a personal finance writer based in Brooklyn, New York.
