A certificate of deposit (CD) account has become a top choice for savers looking to protect their savings in 2023 and 2024. With interest rates on long-term CDs fixed, savers can earn a competitive rate that remains the same until maturity, despite market fluctuations.
Comparing long-term CDs to three other alternatives:
High-yield savings accounts offer higher interest rates than traditional savings accounts but come with a variable rate nature, which means rates may rise or fall independently. However, this also means the potential for higher returns if rates increase in the future. In contrast, long-term CD rates are fixed, providing a predictable return.
Traditional savings accounts have an average interest rate of 0.43%, making them less attractive to savers. Long-term CDs, on the other hand, can offer significantly higher rates, such as 4.20% for a 3-year term or 4.35% for a 5-year term. This translates to returns that are 876% and 911% better than traditional savings accounts.
Short-term CD accounts have slightly higher interest rates than long-term CDs but come with more flexibility in terms of early withdrawal penalties. However, the difference in return is minimal, as demonstrated by a $10,000 deposit into a 6-month CD versus a 2-year CD. In the latter case, the return would be $857.64 compared to $222.52.
Ultimately, long-term CDs offer a compelling case for savers due to their high rates and fixed nature. Savers can earn a high rate and keep it for potentially years to come. However, it’s essential to weigh the initial deposit against your ability to maintain the account for the full CD term to improve your chances of long-term financial success.
Source: https://www.cbsnews.com/news/why-long-term-cd-better-than-these-alternatives-now