Certificates of deposit (CDs) don't return much these days—it's not uncommon for them to bring in 3% or less. But that wasn't always the case. Believe it or not, in 1984, five-year CDs were paying more than 12% interest.
However, as good as that sounds, it's important to keep in mind that those high CD rates came with high inflation and interest rates. For that reason, savings may not have been quite as robust as they may have appeared on the surface. Fast inflation can strip value out of CD earnings very quickly.
Below, you can compare historic CD rates for six-month, one-year, and five-year CD yields between 1984 and 2022, based on data collected by Bankrate. As you can see from the graph below, the yield curve for all three types of CDs over this time period has declined consistently.
- Certificates of deposit (CDs) are not known for producing high earnings, as high interest rates are relatively low.
- The benefits of CDs include a high degree of safety, reliable passive income, and higher yields than most deposit accounts.
- Periods when CDs have higher interest rates tend to correlate with high inflation, which can negate the spending power of any earnings.
Will CD Rates Go Up Again?
It's certainly possible that CD rates could go up again in the near future. If inflation starts to get higher and interest rates start rising, we'll probably find CD rates rising as well, as these are two major factors that help determine CD interest rates.
Hopefully, we won't see any massive rise in inflation and interest rates anytime soon. And if that doesn't happen, then the question is, "Are CDs still a good way to save money?"
Why CDs Can Be a Good Savings Vehicle
If you have extra money to save that you can put into a medium- to long-term savings vehicle, then CDs are a good way to go for at least some of your money. There are several reasons for this, but the most common reason that people save money in CDs is that they're extremely safe.
CDs aren't volatile like the stock market. If you are near or in retirement, or if you are risk-averse, they can be a good option.
CDs Are Insured by the Federal Government
CDs are backed up by the Federal Reserve and are insured for up to $250,000 per depositor, per FDIC-insured bank.
That means that if you have a great deal of money to put into savings, you can save across several different banking institutions and still have it all be insured by the federal government.
Contrast that with a stock investment—where, if the company goes under, you can end up losing everything.
The current rate of return on CDs will rarely outpace the rate of inflation, so while you won't lose capital with a CD and you will gain interest, you are likely to lose buying power over time. This is important to consider as you decide how you will distribute your savings and investments.
CDs Can Give Peace of Mind
Because CDs are one of the safest investments around, they can give you serious peace of mind. By knowing that your money—or part of your money—is safe from the craziness of the stock market, you can rest easy. You don't have to worry about those funds.
You know they'll be there for you when the certificate matures and that they have made a little money along the way.
CDs Can Provide Guaranteed Income
When you own certificates of deposit, you know exactly at what rate they are going to give you income. For example, if you have $250,000 in a CD at a 3% return, then you know you'll get about $625 per month in guaranteed income. That's a nice chunk of change to know for sure that you have coming in.
Guaranteed passive income is particularly important when you are retired or pursuing a path of entrepreneurship.
CDs Can Provide Diversification
The reality is that you never know what the stock market is going to do. It may rise to new heights and then crash like it did in 2008 (or 2020, for that matter). As a result, it might not be a good idea to have all of your eggs in one basket. By putting a percentage of your money in a "safe" savings vehicle like a CD, you'll know that no matter what happens to the stock market, there will be money set aside.
Even if you invest in stocks, bonds, and mutual funds, you may want to consider CDs as a part of your investment portfolio.
CD Yield Beats Money Markets
While CDs don't often outperform the stock market over the long haul, they do perform much better than the typical money market account. Certificates of deposit usually have a five to 10 times higher yield than money market accounts. That's a pretty big margin.
CDs Are a Solid Investment Option
It would be great to make 12% to 15% off of CDs, but you'd probably also be seeing runaway inflation and interest rates at the same time. Because of that, it may be better to have CDs at lower rates, and to continually put money into them so you can roll them over when they mature.
Doing this can create a very nice passive income stream that you can rely on if times get tough. And for many people, that kind of security is priceless.
Frequently Asked Questions (FAQs)
What causes CD rates to rise or fall?
Interest rates on CDs are set by financial institutions, so there will be slight variations from one CD to another. Still, to make money on these products, the financial institutions have to base their interest rates on the federal funds rate.
Should I cash out my low-interest CD to invest in one with a higher interest rate?
If your current CD has not yet reached its maturity date, you will probably have to pay a penalty fee for early withdrawal, so take note of this loss first. If your CD is almost mature, you have the option of cashing out or continuing to invest. The specific interest rate on a CD will be set by your financial institution, and is usually for higher and longer-term deposits. These are the factors you'll need to consider when choosing how to treat your current CD.