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.
While the Federal Reserve kept rates high to combat inflation throughout the past two years, returns on many CDs rebounded to a respectable level above 4%, with many promotional rates still approaching 5%.
“As many anticipate the Fed to begin lowering rates at its September meeting, now may be the time to act if you’ve been contemplating a CD,” said Jennifer Ellis, a senior consumer product manager at BOK Financial.
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 period, banks offer interest rates that usually exceed those offered on savings accounts.
“CD rates are still higher than most traditional savings accounts and offer the guarantee of knowing how long you will get that rate,” said Ellis.
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,” said Amanda Barrett, manager of product intelligence and support at BOK Financial, 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,” said Ellis. “And we expect them to continue to be a valuable savings tool even as interest rates begin to come down in the near term.”
Since each situation is unique, though, Barrett recommends a conversation with a banker to review all 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.
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