CDs back in play
After years in the shadows, certificates of deposit are being rediscovered by savers attracted to higher yields
Bank certificates of deposit (CDs) spent years largely as an afterthought for many savers and investors, as near-zero Federal funds rates kept returns low.
However, as the Federal Reserve has raised rates to combat red-hot inflation, returns on many CDs have rebounded to a respectable level.
More specifically, as the Fed pushed its key lending rate to 5.0% from next to nothing between March 2022 and this May, annual interest rates paid on select short- and long-term CDs leapt past 4%, prompting a reawakening among many savers.
"There was a time not long ago that to earn around half of the annual yield available currently, you had to open a five- or seven-year CD," said Amanda Barrett, manager of product intelligence and support at BOK Financial®. "That was one of the results of the Fed holding rates near zero for so long, but now you can find returns that are worth looking at again."
Assured returns in a relatively simple format
As a refresher, banks offer CDs to gather funds that help them extend loans and other services to their customers. In exchange for holding these deposits for a specific time period, banks offer interest rates that usually exceed those offered on savings accounts.
"There are many ways to save money, but none offer the predictable return and security that CDs do," Barrett said.
Some of the benefits of CDs over other ways of saving include:
- Stability: A CD's return is guaranteed, unlike the potentially volatile performance of stocks and bonds.
- Security: CDs offered by banks fall under the Federal Deposit Insurance Corporation (FDIC)* umbrella, which protects up to $250,000 of an individual's total deposits.
- Flexibility: Terms on CDs range from as short as seven days to as long as seven years, and some allow for penalty-free withdrawals prior to the maturity date.
- Accessibility: For individuals who already have a bank account, setting up a CD at the same institution is as easy as making a quick phone call or a short visit to a local banking center.
An asset-building tool
Outside of their core attributes, CDs provide versatility in savings efforts, Barrett said, especially when used in an effective strategy known as laddering. The approach involves investing in CDs on a regular basis to create staggered maturities and a blend of yields based on market conditions over time.
For example, investing $1,000 in a two-year CD every six months creates a steady progression of maturity dates. At each of these dates, a saver may elect to invest in a new two-year CD to keep the cycle going or cash out to complete a planned purchase.
"It can be a powerful tool to build assets, especially for people just starting out," Barrett said. "Perhaps you set a savings goal of $2,000 and once you get there, you put half into a shorter-term CD and work on building up the savings balance again."
Such efforts can bolster the growth of an emergency savings fund—especially once a core level has been achieved—as well as aid in savings for longer-term goals such as a wedding or a down payment on a house.
In addition to individual savings efforts, CDs may also account for part of a diversified portfolio in an individual retirement account (IRA) or be incorporated into businesses' cash management maneuvers.
"The advantages of a CD aren't limited to a specific age group or savings goal, and now that rates are once again competitive, we're seeing interest rising across our client base for short-term and long-term uses," Barrett said.
"Since each situation is unique, though, it makes sense to sit down with a banker and review all of the options to determine what strategy works best for your situation and goals."
*The Federal Deposit Insurance Corporation (FDIC) is a US government corporation that insures the money in your accounts up to $250,000. Our CDs, checking accounts, savings accounts, and money market accounts are insured up to the maximum $250,000 per depositor, as allowed by law.