Here at The Motley Fool Ascent, we do our very best to cover the money news that impacts your life and finances. So it’s really no surprise that we’ve been discussing certificates of deposit a lot lately. The rates on CDs, particularly shorter-term options, have been noticeably higher thanks to the increases in the federal funds rate by the Federal Reserve. This attempt to bring down high inflation in the wake of COVID-19 doesn’t have a direct effect on consumer interest rates, but the two tend to trend in the same direction.
However, the Fed has signaled that rate cuts are likely on the way later this year, depending on how inflation moves (as of the most recent CPI report, it was holding steady at 3.5%). So, if you want in on CDs, now is really the time to make your move!
You might expect that all of us here are 100% all-in on CDs, but you’d be wrong. Personally, I have yet to open a CD of any kind, ever. I appreciate these accounts for what they are, but my financial situation hasn’t ever been quite right to take advantage. So here’s one scenario where a CD would be perfect for me — as well as a few alternative places to keep your money safe and growing.
A CD is a great option in this scenario
Let’s say you’ve got $10,000, and you’re going to be using it to buy a car in a year. By having a peek at our list of the best 1-year CD rates, you find out that you could earn a guaranteed $525 on your money with a 5.25% APY, and finish with a balance of $10,525. Not bad!
I’ve never in my life experienced a scenario like this, tailor-made for a CD. I’ve only had a small amount of money (a few hundred dollars) put aside without a defined timeline, meaning I’d need it any time. This is inappropriate for a CD because if you lock money into a CD for a set term, you’ll owe a penalty if you need to break the term early. The penalty could eat up all the interest you’ve earned so far — or even eat up some of your principal if it’s early in the CD’s term and you haven’t earned enough interest to make it up yet.
The other savings scenario I’ve been faced with these last few years is actively growing my saved cash over time. I set a goal to save $50,000 in 2023 to facilitate buying a home in 2024. I surpassed that goal, and as I write this, I am weeks away from closing on a house, and I’m still saving (which should tell you how expensive I expect this whole process to be).
But since I’m still adding more money to my savings account, a CD wouldn’t work here, either. You can’t add more money to a CD over time. And sure, I could’ve opened a series of CDs when I reached set milestones. But I wanted that cash to be as liquid as possible, especially since my home-buying timeline wasn’t any more specific than “2024.”
Where should you save?
With modern banking, we have so many options for where to store and grow our money — and even options within those options! For example, the overwhelming majority of banking institutions offer at least one savings account. But institutions that offer banking services include big-name national banks, regional banks, online-only banks, and even tiny community credit unions.
In general, though, here are some great options to grow your savings that might work better for you than a CD. (With the caveat that you will not get the guaranteed fixed rate of return that CDs offer!)
High-yield savings account
This is where I keep my savings, and you can find the highest available APYs on the accounts offered by online-only banks. The best high-yield savings accounts (HYSAs) also offer great mobile apps to help you manage your money and minimal (or ideally, no) fees.
Money market account
If you can meet the often-higher opening balance requirement, a money market account (MMA) can be a great option for savers. You get the higher APY of a HYSA with the easier money access of a checking account — many MMAs come with a debit card and/or check-writing capabilities.
Brokerage account
If you’ve got a longer timeline for your money, consider investing it in the stock market using an account you open with a stock broker. Yes, this option carries risk — but if you’ve got a long enough timeline, you’ll be more likely to come out ahead. The S&P 500 has averaged a 10% annual return over the last 50 years. That beats the pants off 5% for a CD if you truly do have years to wait.
If you’ve already got a chunk of money saved and a defined timeline of less than five years for it, a CD might be an excellent option for you. Personally, I’m optimistic that opening a CD might be a good option for some of my money at some point (but perhaps not before rates fall again). The great thing about personal finance is that it’s just that — personal. So weigh your options before making the right choice for you.
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