4 Compelling Reasons Opening a Long-Term CD This December Is a Wise (and Fruitful) Investment
Written by
Ashley Donohoe
Edited by
Daria Uhlig
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As the year closes, it’s a great time to consider your personal finance goals and invest your money. A long-term certificate of deposit can be ideal when you have a lump sum you want to invest for at least two years and you prefer a guaranteed return. Although it requires a commitment, this type of CD can be very fruitful in the current interest rate environment.
Here are four compelling reasons why you should consider opening a long-term CD this month.
1. High Interest Rates Are Available Now
The 11 federal funds rate increases since March 2022 have driven interest rates to the highest they’ve been in 22 years. While this increased rates across all savings accounts, CDs have particularly rewarded savers due to their fixed terms. Short-term CDs often have the best rates, but long-term ones still offer competitive returns.
As of November 2023, the Federal Deposit Insurance Corporation listed national average annual percentage yields of 1.55% for two-year CDs, 1.39% for three-year CDs, 1.32% for four-year CDs and 1.39% for five-year CDs. You can compare those to the current 0.46% APY for a plain savings account.Â
Plus, when you opt for credit unions or online banks, you can often find long-term CDs with rates over 4%. To see how your money could grow, consider that a three-year CD with a $3,000 deposit and 4.30% APY (compounded daily) would earn you around $404.
2. You Can Protect Your Savings From Future Rate Cuts
As the Federal Reserve continues monitoring the nation’s inflation, there’s a good chance that 2024 will involve interest rate cuts, reported Reuters. Unfortunately, that means you can expect to start seeing lower savings rates on CDs, high-yield savings accounts and other deposit accounts.Â
An advantage is that, unlike regular savings accounts, long-term CDs usually have fixed rates that these changes won’t affect. By opening your account this month, you can potentially lock in a competitive rate for several years. While you might feel tempted to wait in case rates rise again, that is risky since cuts could happen instead.
3. Long-Term CDs Are Very Safe Investments
Although bonds and stocks can offer potentially higher returns, long-term CDs are much safer places to put your cash. Along with enjoying a guaranteed rate, you likely won’t have to risk losing your initial investment like with these alternative investment choices.
Both online and brick-and-mortar institutions offering CDs should have deposit insurance that safeguards your cash. While the FDIC covers banks, the National Credit Union Administration covers credit unions. The individual limit is typically $250,000 for your deposit accounts across each institution.
4. You’ll Still Have Options for Flexibility
If you’re nervous about agreeing to a long CD term, there are some flexible options to consider. For example, you can split your savings across short- and long-term CDs to improve your liquidity and earn different interest rates. And while not as common with long terms, rate-bump CDs exist that can let you take advantage of a future rate increase.
Plus, you could still withdraw your CD funds early in an emergency. Just know that the bank may take back up to a year of interest.
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