Are CDs a good investment for 2024?
The bottom line
CD rate forecast: 2024
The Fed kept its rate the same after its second meeting of 2024 on March 19-20. Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on March 19.
With higher APYs and possible interest rate cuts coming, certificates of deposit (CDs) could be worth adding to your personal finances in 2024. CDs are safe investments when you put your money in FDIC-insured banks (or NCUA-insured credit unions).
"Shorter CD rates won't collapse and will still offer far higher yields than the ones we experienced in 2021 and prior years," Krumpelman says. "Even in 2025, we expect short CDs to pay more than 3%."
While McBride had expected mortgage rates to fall to 5.75 percent by late 2024, the new economic reality means they're likely to hover in the range of 6.25 percent to 6.4 percent by the end of the year, he says.
The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time. While that amount will be different for everyone, you should keep a few things in mind.
During the Great Recession and its aftermath, the stock market went through turbulent shifts, resulting in great losses for some stockholders. CDs are one option that can help protect your investment from times of turmoil by providing a stable income.
The 10 best 5-year CD rates for April 2024: earn over 4% The best 5-year CDs are paying depositors up to 4.61% APY, but you better grab this superior rate while you can. Interest rates may be near two-decade highs, but they will likely start to decline now that inflation has cooled off.
Will CD rates stay high in 2025?
Also keep in mind that snagging the highest APY isn't the only way to win with today's CDs. Since CD rates could fall much further in 2024 and 2025, locking in a rate soon that's guaranteed for a year or more down the road could be a smart move.
According to the Summary of Economic Projections, the Fed may implement at least three 25-basis point interest rate cuts in 2024—bringing the federal funds rate closer to 4.60%. Once this happens, it won't be surprising to see banks following suit and decreasing their savings account rates.
Overall, experts predict CD rates to fall from their recent peak later in 2024 alongside anticipated rate cuts by the Fed.
The median estimate for the fed-funds rate target range at the end of 2025 moved to 3.75% to 4%, from 3.5% to 3.75% in December.
Importantly, the SEP projects that the Federal Funds rate will fall to 4.6% in 2024, 3.9% in 2025, and 3.1% in 2026. This implies three 25 basis point rate cuts in 2024.
How CDs work. Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
If you have money to save that you won't need to touch for at least six months, a 5% CD may be worth considering. These CDs earn rates well above the national average CD and savings rates, according to the FDIC. However, you should consider more than just APY when deciding whether or not a 5% CD is a good investment.
What was the highest CD rate historically? According to the Federal Reserve, the highest CD rate was for a three-month CD term in December 1980, which reached an average of 18.65%.
This 6.00% CD Leader Is Available to Anyone Nationwide
Offered by American 1 Credit Union, this leading nationwide certificate is available for a 12-month term with a $1,000 minimum deposit.
Can you put 500k in a CD?
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
Use Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
References
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