Certificates of deposit are considered especially safe investments—but they don’t offer as much growth potential as alternatives, like stocks and bonds.
Hours of research by our editors, distilled into minutes of clarity.
Unlike standard savings accounts, CDs require you to lock in a fixed deposit for a set term, earning higher interest rates in exchange for limited access to your funds.
CDs come in varying term lengths, from three- or six-month commitments to decadelong terms. Typically, the longer the term, the higher the interest rate.
For instance, if a bank needs more deposits to fund loans, then it may offer high interest rates to attract deposits. Alternatively, a large bank with sufficient deposit reserves may have less incentive to grow its CD portfolio, offering lower rates as a result.
The federal funds rate is the interest rate at which banks lend their excess funds through the Fed. This influences what banks are willing to pay consumers for their deposits in savings and CD accounts. Typically, the higher the federal funds rate, the higher the interest rates on CDs.
This way, you take advantage of high interest rates with longer-term CDs while keeping liquidity with shorter-term CDs. If you’re well acquainted with the basics of CD investing, the Wall Street Journal’s Oyin Adedoyin, and guest host Danny Lewis, can tell you how staggering your investments makes good money.
Banks in the US started issuing CDs in the early 1800s as the banking system began to take shape following the Revolutionary War. The federal government did not formally insure CDs until the FDIC was formed in 1933.
Data itself is not (exactly) a financial advisor, but it can help you decide between a variable or fixed rate CD, or CDs with different term lengths. A chart from the Federal Reserve shows the three-month trend of CD interest rates.
As of mid-2024, the Fed held interest rates at their highest levels in two decades. A standard savings account, meanwhile, has an average interest rate of a mere 0.45%. A podcast episode digs into why you may not be raking in cash from your bank savings.
CDs are generally considered fairly safe investment options. A CD bought via a federally insured bank is insured up to $250K.
When purchasing a certificate of deposit, it's important to know if you are purchasing a “deposit” product issued by an FDIC-insured bank.
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