One bright spot from the Fed's interest rate hike is the rise in returns on savings accounts, including certificates of deposit. In 2022, when interest rates began to rise, the average interest rate on savings accounts rose from 0.06% to 0.30%. Since October 2023, it has remained at 0.46%. Higher interest rates make savings accounts more attractive, especially if you're looking for a safe place to store your money.
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We expect the Fed to start lowering rates this year, but this decision may have you wondering if it's time to lock in high interest rates with a 10-year CD. Let's take a closer look at the advantages and disadvantages.
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Why invest in a 10-year CD?
CDs can add diversification to your financial portfolio and keep some of your cash away from riskier investments. Longer terms, such as 10 years, can be an attractive savings option if you're planning for future purchases, such as a down payment on a home, a child's education, or funds for retirement.
Lock-in rate
If you open a 10-year CD now, you lock in your current interest rate. When interest rates start to fall, your savings account income will decrease, but your CD rate will remain the same.
Stability in an uncertain market
Certificates of deposit are stable and predictable investments. Since you know your interest rate won't change over the life of your CD, you can calculate exactly how much interest you'll pay.
financial discipline
Savings accounts are convenient because you have access to cash whenever you need it, but you may be able to keep your money where it is by putting it in a CD. Because there are penalties for early withdrawals, CDs can help you avoid impulse purchases.
Why you should avoid investing in 10-year CDs
Like any investment, 10-year CDs have downsides. When opening a CD for long-term storage, it's important to consider what you're giving up.
access to cash
A 10-year CD is less risky than the stock market, but 10 years is a long time to wait for cash. This is not a place to keep an emergency fund or money you expect to need in the next few years.
Early withdrawal penalty
Before you open a CD, find out what penalties your bank will charge if you withdraw your money before the end of the term. By comparing these penalties across banks, you can see exactly how much you will lose if you cash out early.
Fee
Interest rates on 10-year CDs are typically lower than on short-term CDs. This is because longer terms are riskier for banks, especially when interest rates are high. For example, Discover pays 3.80% APY for a 10-year CD, but for a 5-year CD he pays 4.00% APY, and for a 1-year CD he pays 5.00% APY.
final take
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Whether or not to open a 10-year CD is a personal decision and depends on your financial goals and risk tolerance. If you don't need the cash right away and can lock in an attractive rate, it may be worth considering a CD with a long term CD.
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This article originally appeared on GOBankingRates.com: Should you invest in a 10-year CD?
