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Dashia Milden is a staff reporter for NextAdvisor based in North Carolina. She has previously written for…
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Interest rates have made a historic rise this year, and there aren’t yet signs of slowing down.
A rising rate environment is great for earning variable interest on your savings or taking advantage of short-term fixed rates, so you can take advantage of higher interest in the future. But now is not the time to lock in a five-year CD.
“If you lock in for five years at the best interest rate today but the Consumer Price Index and inflation continue to go up, over the next [few] years you will have lost significant purchasing power,” Cady North, a certified financial planner and founder of North Financial Advisors in San Diego. “That’s the risk you take by locking in an interest rate for a longer period of time.”
Today, the average five-year CD term already earns over 3% APY, based on our best CD rates. But five years is a long time, especially when five-year terms were earning under 1% just a few months ago. By locking in today’s rates, you’ll risk missing out on a potentially better APY in the future.
Here are the best five-year CD rates today and when you should consider adding a long-term CD to your savings strategy:
Note: The APYs (Annual Percentage Yield) shown are as of September 23, 2022. The APYs for some products may vary by region.
Longer CDs generally offer higher interest, but a few extra dollars annually isn’t worth the drawbacks for most savers today.
Here’s why: Locking in a five-year CD rate means you’ll miss out on the bigger returns banks will likely offer in the near future. And once you open a CD, you can only move your money out before the term ends by paying a withdrawal penalty. This penalty can vary, but is usually a portion of your interest earned.
Even if you have money you know you won’t need for five years or more, it’s best to consider other options besides a five-year CD, says Jeb Jarrell, certified financial planner and founder of Plentiful Wealth, a financial planning firm in Ashland, Kentucky.
Shorter-term CDs, Money market accounts, and high-yield savings accounts may not offer rates as high as a five-year CD today, but you’ll maintain greater access to your funds and can take advantage of rising rates.
For example, say you had the option between a high-yield savings account earning 0.50% APY and a five-year CD earning 0.80% APY one year ago, when rates were extremely low. If you chose the CD option then, you’d still be earning that 0.80% APY today. But if you chose the high-yield savings with 0.50% APY then, you may now earn closer to 2%, since rates on those accounts are variable and have increased. Even though the five-year CD’s interest rate seemed like the beter option then, their long-term value depends on what rates will do in the future.
“Chasing yield isn’t always the best, because if you had left your money in a high-yield savings account, feasibly your interest rate in year three will be twice than what the [five-year] CD was,” says North.
Five-year CDs offer a guaranteed, fixed return in exchange for you being willing to set your money aside for a while. Fixed interest rates can be beneficial if rates drop, or a drawback while rates are rising. Here are more pros and cons to consider before opening a long-term CD:
Higher interest rate compared to some other savings options
Can be useful to lock in a rate when interest is falling
FDIC-insured deposits
No liquidity for five years
Fixed interest rate can be less valuable in a rising rate environment
Withdrawal penalty if you take money out before maturity
Here’s how shorter CD terms stack up against five-year CDs today.
If you want to lock in a solid interest rate for a shorter time commitment, one-year CDs are a solid pick. Rates on shorter-term CDs are, on average, less than longer-term options, but they are better for maintaining liquidity, especially as rates rise.
The good news is that since one-year CDs mature within a year, you’ll have more flexibility compared to three- and five-year terms to roll your funds into a new CD in the near future.
However, there are even more flexible options to consider, too, that may give you more flexibility and variable interest rates — such as a high-yield savings account or an even shorter CD, such as a six-month term. These can be great for money you may need to access quickly or for your emergency savings.
Even if you’re willing to set aside your money for several years in a three-year CD, it’s not the best option for most savers right now — just like with 5-year terms.
By opening a 3-year CD term, you’ll lock in today’s rates and cannot withdraw without penalty for the entire three-year period. Long-term CDs may be worthwhile when the Federal Reserve changes its language around combating inflation, experts say, but not while rates increase today.
If you withdraw money before your CD matures, you’ll pay a withdrawal penalty on your principal balance. Usually, the penalty is a few months of interest, but it depends on your bank.
Yes, if you choose a traditional CD, you’ll have a fixed interest rate for the duration of your CD term. When your CD matures, you can roll the money into a new CD that may have a better interest rate.
If you’re looking for an alternative to CDs with more flexibility but still want to earn a return on your principal balance, high-yield savings accounts and money market accounts are good options. Remember to compare rates, required minimum deposits, and other account types before choosing one.
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