There was a time not too long ago when obtaining a certificate of deposit (CD) with a 5% interest rate was relatively easy. Currently, achieving a rate close to 5% proves to be more challenging, with rates around 4.75% being more common.
A 4.75% CD remains a competitive rate when compared to earlier times, where rates as low as 2% were standard. Presently, the rates are still considered relatively high.
Additionally, there is potential for finding better rates than 4.75% with some research. However, even with attractive CD rates, not everyone is inclined to open a new CD. One reason is personal financial strategy and circumstances.
For instance, some individuals prefer not to use funds from their emergency savings to invest in a CD. Having a robust emergency fund provides peace of mind, especially for individuals who are self-employed and face unpredictable income streams. Switching funds from a savings account to a CD may offer slightly higher returns, but the fear of incurring an early withdrawal penalty during financial emergencies can be stressful. Therefore, maintaining the emergency fund in a savings account is a preferred option for some.
Furthermore, aligning financial goals with investment strategies is crucial. Some individuals aim to save regularly and invest those savings, rather than locking funds in a CD. For long-term goals, such as retirement, investing in stocks offers the potential for greater returns. The S&P 500 has averaged an annual return of 10% over the past 50 years, which highlights the possible benefits of choosing stock investments over CDs with rates around 4.75%.
In situations where the focus is on short-term financial goals, opening a CD might be advantageous. However, for those with long-term objectives, such as retirement savings, exploring a brokerage account to begin investing could be a more suitable approach.
Ultimately, while the allure of a CD with current rates remains strong, individual financial situations and goals should dictate the choice of investment. Keeping emergency savings secure in a savings account and prioritizing long-term investments over a CD may be more appropriate for those with similar financial plans.
