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Sunday, April 21, 2024

Why you should move your savings to a 5-year CD today

One crucial component of any financial plan is making your money work for you. And, one simple way to achieve this is by exploring various investment and savings options.

While traditional savings accounts have their benefits, they often fall short when it comes to growing your wealth. Right now, for example, the average regular savings account offers a paltry rate of just 0.46% — which won’t move the needle on your savings balance. Not very quickly, anyway.

But opting to put your money in a certificate of deposit (CD) could be the better financial move. And, while short-term CDs offer some of the highest rates available right now, it could make more sense to put your savings in a longer-term CD, like a 5-year one, instead.

Explore how a CD could grow your savings here.

Why you should move your savings to a 5-year CD today

There are a number of good reasons to move some of your savings to a 5-year CD today, including:

To earn competitive interest

One of the primary reasons to consider a 5-year CD is the competitive interest rates they offer — and that’s especially true right now. Unlike traditional savings accounts that often yield very low returns, 5-year CDs typically provide higher (and fixed) interest rates. In this high-rate environment, it’s possible to find CDs offering rates of 5.5% or higher on your money — and some CDs even offer rates as high as 7%. With rates that high, your savings will grow quickly.

And, while many high-yield savings accounts are offering rates that are as high as CDs currently, the rates aren’t fixed — they’re variable. So, when rates eventually drop, the interest you’re earning on your savings will go with them. But if your money is locked in a CD instead, you’ll earn the same rate you get today throughout the full 5-year CD term, no matter what happens with the wider rate environment.

Explore your top CD options here.

To keep the risk low

Compared to more volatile investment options, like stocks, a 5-year CD is a lower-risk choice. Your money is protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000, which means that your principal and interest earnings are secure. This makes 5-year CDs an excellent option for risk-averse savers who want to protect their money while still earning a reasonable return.

But you can’t say the same thing about the stock market. If you put your money into stocks and the market tanks, you could lose some (or all) of your investment. And, market declines can happen quickly, so you may not have time to cash out before it happens.

To diversify your savings portfolio

Diversification is a key principle in building a robust financial portfolio. By adding a 5-year CD to your savings strategy, you can diversify your investments. This can be especially important if you’re already heavily invested in stocks or other higher-risk assets.

After all, a CD provides stability in your financial plan, ensuring that a portion of your savings is protected from market fluctuations. And, with a 5-year CD, that protection lasts for a full five years.

For peace of mind

One of the more significant advantages of putting your savings in a 5-year CD is the peace of mind it can offer. Knowing that your money is safe, earning a predictable interest rate and being locked in for a fixed term can be reassuring. This can be particularly valuable if you have specific financial goals, like saving for a down payment on a home, funding a child’s education or planning for retirement.

To discourage impulsive spending

One common drawback of a regular savings account — or a high-yield savings account — is that it’s easy to access your funds, making it tempting to dip into your savings for non-essential expenses. But a 5-year CD discourages impulsive spending because it typically comes with early withdrawal penalties if you want to access your money before the CD matures. This encourages disciplined savings habits and can help you stay on track toward your financial goals.

The bottom line

While a 5-year CD may not be the right choice for everyone, for many it can be a valuable addition to your financial strategy, offering competitive interest rates, low risk, diversification, peace of mind and a disciplined savings approach. To make an informed decision, consider your financial goals, risk tolerance and the amount of money you can afford to lock away for five years. By moving your savings into a 5-year CD today, you can take a significant step toward securing your financial future.

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