Are CDs a Good Investment in 2023?

Are CDs a Good Investment in 2023?

Is Now a Good Time to Invest in CDs?

At its last policy meeting in July, the Federal Reserve raised the target for the federal funds rate, a key overnight bank lending rate, to a range of 5.25% to 5.50%. It was the 11th rate hike since March 2022 as part of the central bank’s campaign to reduce inflation to 2%. While this makes borrowing money more expensive, it also increases the annual percentage yield (APY) you could get on a savings account or certificate of deposit (CD).

As the Federal Reserve continues its campaign to rein in inflation, the interest rates on various financial products have been on the rise. One such product that has gained attention is the certificate of deposit or CD. CDs are a type of savings account that typically offer higher yields compared to standard savings accounts or money market savings. They lock your money away for a set term, ranging from three months to ten years. The annual percentage yield on a CD remains constant throughout the term, even if the Federal Reserve slashes rates during that time.

While there are CDs available for shorter terms, the larger yields are typically found with terms of at least one year. For those looking for the highest available CD rates, we have compiled a list of the top rates for 1-year CDs, 3-year CDs, and 5-year CDs.

Best Current CD Rates

1-year CD rates

  • USAlliance Financial
    • APY: 5.40%
    • Minimum Deposit: $500
  • Popular Direct
    • APY: 5.50%
    • Minimum Deposit: $10,000
  • CIBC Bank USA
    • APY: 5.36%
    • Minimum Deposit: $1,000

3-year CD rates

  • U.S. Senate Federal Credit Union
    • APY: 5.13%
    • Minimum Balance: $1,000
  • Quorum Federal Credit Union
    • APY: 4.85%
    • Minimum Balance: $1,000
  • Lafayette Federal Credit Union
    • APY: 4.84%
    • Minimum Balance: $500

5-year CD rates

  • Lafayette Federal Credit Union
    • APY: 4.68%
    • Minimum Deposit: $500
  • Department of Commerce Federal Credit Union
    • APY: 4.67%
    • Minimum Deposit: $500
  • MYSB Direct
    • APY: 4.66%
    • Minimum Deposit: $500

CDs offer a locked-in rate that could earn consistently high interest for up to ten years. However, there are pros and cons to consider before investing in CDs.

Pros and Cons of a CD

On one hand, CDs provide higher locked-in APYs for up to ten years, regardless of what the Federal Reserve does with interest rates. This stability makes them attractive to savers looking for a reliable return on their investment. On the other hand, the money committed to a CD remains inaccessible until the term ends. Withdrawing money before the maturity date results in heavy penalties, making CDs unsuitable for emergency funds.

While some banks offer high-yield savings accounts (HYSAs) with rates that change frequently, CDs provide a fixed rate for the entire term. This stability can be beneficial for disciplined savers who want to earn consistent interest on their balances. However, it is important to have a readily accessible form of savings, such as a standard savings account or money market account, even if the interest rates are not as high compared to a CD.

One drawback of CDs is that if interest rates continue to rise after you have locked in your rate, most banks do not allow you to take advantage of the higher rates. This means you could miss out on potential additional interest earnings. To combat this concern, some banks offer Bump-Up CDs that increase your interest rate if the bank raises its rates.

So, is a CD a good investment?

A CD can be a good FDIC-insured investment as long as you don’t need the money before the maturity date. Let’s illustrate the returns a CD might offer. Suppose you deposit $10,000 into a 3-year CD at 4.85 percent. By the end of year three, you would have earned $1,526 on your balance.

Comparatively, investment options without FDIC backing, such as the S&P 500 Index, may offer a higher return on the same amount of money. For example, the Vanguard 2023 Benchmark Returns report shows a 3-year average annual return of 13.72% on the S&P 500 Index as of July 31st, 2023.

In the end, the decision to invest in CDs depends on your financial goals, risk tolerance, and liquidity needs. CDs can be a great way to set aside money while earning higher interest rates on your balances, but it’s important to have a well-rounded financial strategy that includes accessible savings as well.

Check out the related content below for more information on the best CD rates, savings calculators, and shopping around for the best returns.