The Fed has been hinting interest rates are on the way down, which makes now the right time to open a CD

  • Certificates of deposit offer better interest rates than traditional savings accounts, but you have to lock your funds away for a period of time.
  • With interest rates expected to go down, opening a CD today can lock in your rates for months or years at today’s rates.
  • Unlike stocks and bonds, CDs are insured by the US government and have virtually no risk.
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A certificate of deposit, commonly called a CD, is a type of bank savings account that offers customers more favourable interest rates than most traditional savings accounts. But there’s a big string attached: You have to leave the money for a set period of time or pay a penalty.

There are some very good uses for CD accounts in your savings plan, but they are not always right for everyone. With the Federal Reserve hinting that interest rates could go down in the future, it could be the right time to say yes to a certificate of deposit.

How CDs work

CD accounts are government-insured savings accounts offered by many banks and credit unions. A CD is a time-bound account that will typically offer you a higher interest rate the longer you are willing to lock in your deposit.

If you decide to withdraw from the CD early, you’ll have to pay an interest penalty. Depending on the CD, it could be as little as a few months of interest. On longer CDs, the cost can be much more significant. This is why it’s best to only use a CD when you know with some certainty that you won’t need the money until after the maturity date.

When CDs make sense

CDs are best for people looking to save money somewhere safe when they know they won’t need it in the near future. It doesn’t work for an emergency fund, which you could need to access quickly. It’s better for something like a down payment, college savings, or other long-term goals.

When interest rates are rising, long-term CDs aren’t the best choice, because you’d lock your money away at a low interest rate. But when rates are expected to go down, which is the most likely scenario right now, you could lock in a rate higher than what you would get in the future. That is the best timing for a CD.

If you don’t have any immediate need for the funds, one popular way to set up your money is in a series of CDs with a range of maturity dates. Also called a CD ladder, this strategy means all of your money isn’t locked away for too long of a period without getting access to some of your savings.

Why a CD isn’t an investment

Some people describe a CD as an investment, but that gives it a connotation of having risk. CDs are more like a savings account than a money market fund. At a bank, CDs are insured by the FDIC. At credit unions, you get NCUA coverage. In either case, even if the bank goes out of business, you’ll get your money back.

The FDIC and NCUA limits are $US250,000 per depositor, per account, per institution. If you have six or seven-figure savings you want to store completely insured, you can open a CD within that limit and can probably get more interest than a savings account. If you open a joint CD, you are insured up to $US500,000 in that account.

Save with a CD if it fits your financial plan

With interest rates at a potential peak for the foreseeable future, the timing is perfect to build a CD ladder or create your own CD strategy that aligns with your financial plans. If the timing is also right for you, don’t wait for rates to go down. Get that account set up before the next Federal Reserve meeting.

CDs won’t give you the same expected return as something like a bond fund or the stock market, but the stock market comes with a lot more risk. A certificate of deposit offers a sweet spot in between getting a bit more interest and playing it safe.