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MoneyWatch: Managing Your Money
By Joshua Rodriguez
Edited By Angelica Leicht
/ CBS News
A certificate of deposit (CD) is a secure way to make your money work for you. And considering today's current high-rate environment, returns on these savings vehicles are hard to ignore. But those high rates aren't going to last forever.
Today's high interest rates are the result of the Federal Reserve's efforts to combat high levels of inflation. As inflation continues to cool across the nation, there's a growing belief that rates will fall at some point in the new year. So, it may be a wise decision to lock in today's rates while you still can.
Open a 5-year CD now to lock in today's impressive returns.
Why you should put $20,000 into a 5-year CD now
There are a few reasons you should consider putting $20,000 into a 5-year CD right now. Those include:
CD returns are impressive
The Federal Reserve has raised its target federal funds rate 11 times since mid-2022 in an effort to combat inflation. That's important for CDs because the federal funds rate forms the foundation for rateson deposit accounts.
Some of the top 5-year CD options on the market now offer APYs over 4.5%. What does that mean if you deposit $20,000? Here's how much money you stand to earn:
- $20,000 at 4.5% APY: $4,923.64 in interest (for a total of $24,923.64 after five years)
- $20,000 at 4.55% APY: $4,983.32 in interest (for a total of $24,983.32 after five years)
- $20,000 at 4.60% APY: $5,043.12 in interest (for a total of $25,043.12 after five years)
Take advantage of today's impressive rates with a CD now.
You can lock in today's rates
Recent data has shown that inflation is cooling across the country. Considering that high inflation was the reason for the federal funds rate increases, we could see rate reductions if inflation continues to slow. In fact, most experts believe the Federal Reserve will start to cut rates at some point in 2024.
Once the Federal Reserve starts to reduce its target federal funds rate, you can expect CD rates to start falling. But you don't have to settle for lower returns.
When you open a 5-year CD today, you'll lock in today's strong ratesfor the next five years. After all, CDs come with a fixed rate of return that's not affected by market or economic conditions once you open your account.
CDs keep your money safe
Safety is a key consideration when it comes to finding a home for your savings. After all, you want to make sure that the money you deposit now will be available to you later. The good news is that CDs are virtually risk-free for two reasons:
- They come with deposit insurance: Most CDs come with either FDIC or NCUA insurance on balances up to $250,000 per depositor, per account. That means the financial institution that holds your money could shutter and you would still get your money back. It would simply be part of an insurance claim.
- CDs are not susceptible to market or economic changes: Once you open your CD, you lock in your rate of return for the entire term of the account. That return rate isn't impacted by changes to market or economic conditions, offering a level of predictability that's unmatched by most other investment and savings vehicles.
What if you don't have $20,000 to put into a 5-year CD?
You don't have to deposit $20,000 in a 5-year CD. The benefits of these savings vehicles are the same whether you invest $20,000 or $5,000. The only difference is the total amount of money you stand to earn.
For example, here's what you can expect to earn by depositing $5,000 into a leading 5-year CD in today's market:
- $5,000 at 4.5% APY: $1,230.91 in interest (for a total of $6,230.91 after five years)
- $5,000 at 4.55% APY: $1,245.83 in interest (for a total of $6,245.83 after five years)
- $5,000 at 4.60% APY: $1,260.78 in interest (for a total of $6,260.78 after five years)
The bottom line
CDs are offering impressive returns given today's high interest rate environment. However, those impressive returns may not stick around too much longer. Consider locking them in with a 5-year CD now to make sure your money works hard for you for years to come.
