I was against 5-year CDs. Here’s why I changed the song:

If you have money earmarked for short-term goals or emergency expenses, a savings account is the best place for that cash. You need to have easy and permanent access to your emergency fund. And you should never take money that you might need within a year and invest it in stocks. When the market plummets, you don’t have time to ride out the downturn and avoid permanent losses.

However, there is a difference between saving in one year and saving in five years. And in the latter case, I used to think that CDs were a poor choice for 5-year goals. The way I see it, why keep your money in a CD for 5 years when you can make so much more money in the stock market? and Have you had time to overcome a long slump?

But since then the tune on the five-year CD has changed. And now I think that under the right circumstances, opening one can be a very smart choice.

When interest rates are favorable, you can make money

Generally speaking, I wouldn’t tell you to put your money into a 5-year CD when the interest rate is 1.50% or 2.00%. There are many relatively stable five-year investments that offer higher returns, such as bonds and bond funds. However, it is a different story when the yield on a 5-year CD is over 4.00%.

The Federal Reserve spent most of 2022 and 2023 raising interest rates in an attempt to calm inflation. This has caused borrowing costs to rise, while also pushing savings rates and CD rates higher.

These days, the interest rate on a 5-year CD is around 4.50%. And if you open a CD at an FDIC-insured bank and limit the amount in the account to $250,000 ($500,000 for joint accounts), the CD is protected, so there is virtually no risk to your money. . Even fairly stable bonds carry some risk of loss, such as if the issuer defaults on its obligations and is unable to return principal.

Why CDs are a Good Idea for 5-Year Goals

So let’s say you’re saving for a goal five years from now. If you invest your money in the stock market, you can enjoy returns higher than 5%. Especially since the market’s average return over the past 50 years has been 10%. But remember, that’s an average number 50 years.

In five years, the market could average 7%, 4%, or -3%. So while you’re there is Investing in stocks for five years has its upsides, but it also has its risks.

With CDs, you don’t really take any risk if you follow the rules above (choose an FDIC-insured bank and make sure your deposits are within FDIC limits). Therefore, at a time when CD interest rates are rising, a 5-year maturity CD do This makes sense because you can get more than 4.00% of your money risk-free.

In fact, I’m no longer one to recommend five-year-old CDs, and I recently opened one myself. I have about 5 years left until I have to pay for college. What happens if you have an investment for that purpose, but that investment sinks right away as the tuition payment due date approaches?

So I recently put a lot of cash into a 5-year CD. I can earn 5% on that money without sleeping.

Don’t wait for 5 year CDs

Due to the current interest rate situation, we believe a 5-year CD may be appropriate in some cases. This doesn’t make sense if you’re 35 and saving for retirement, but it makes sense if you’re saving for short-term goals.

But don’t wait until you open that five-year CD. The Federal Reserve is expected to begin cutting interest rates in late 2024. And once that happens, you may not earn much interest on your long-term CD. So if you’re interested in finding somewhere to keep your money safe for the next five years, move ASAP.

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