Insights & Stories

Why are Certificates of Deposit (CDs) so popular right now?

Reading time: 4 minutes

March 28th, 2023

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If you've been looking into ways to make your money go farther, you've likely heard about Certificates of Deposit. Sometimes referred to as Time Deposit Accounts, but most commonly referred to as CDs, these accounts have been in the spotlight as of late—and rightly so. With interest rates near the highest they've been in years, CDs are a smart investment for everyone wanting a safe, secure, and protected account that will help their money grow.

What is a CD?

Offered by most banks, CDs allow you to deposit funds into an account for a set period of time (also known as the term), and earn interest on the deposit—typically at a higher rate than traditional savings —allowing you to earn more in interest, faster.

During the term of the CD, your money is effectively locked in—if you withdraw funds during this time, you will likely face penalties or fees. Common terms of CDs typically range from three to 24 months, which make them a much more flexible option than many people realize.

Why now?

When you open a CD, the interest rate is set for the term selected, whether that's a few months or a few years. To appreciate the benefits of investing in a CD, it's helpful to understand the current economic climate we find ourselves in. Supply chain issues, and a complicated mix of other factors, has resulted in supply and demand being out of alignment—supplies of goods and services are down, but spending is up. Because consumers are spending quicker than the products and services are being created, prices are soaring.

To help bring down prices, the Fed (known officially as The Federal Reserve System) has been raising rates to slow down the economy so the supply of goods and services can balance with the demand—over time.

Basically, by increasing the rates the Fed makes it less attractive for consumers to keep spending or borrowing money—this slows down their spending, and gives the market time to normalize.

In a 'rising rate environment' like we're in, while it becomes less attractive to borrow money because the interest rates are high, it becomes more attractive to save—because you earn more than you would on your money than you would normally (when you keep it in a bank).

That's why CDs are such a good option right now. When you sign up for a CD, the interest rate you lock in is specific for the term whether you choose a term of a few months or a few years. As the market begins to normalize, rates will decrease, meaning locking in a high rate now will help your money grow faster now and later.

CDs vs other investment options

In comparison to other types of investment, CDs are a much less risky option. Unlike investing in stocks or funds where you can potentially lose money (especially in uncertain economic times), you know what return you can anticipate to get with a CD. And, as long as you use a Member FDIC bank (such as Bank of Hawaii!), your money is protected up to the allowable limits per account type. This means if anything were to ever happen to the bank you save with, you can know your money won't be lost.

If flexibility is your priority, compared to a bond, a CD is easier to access if you have a change of circumstances. For example, if you know you might need the money within a year, you could choose a shorter term such as six months with a CD. With a bond, you may have to sacrifice some of the interest you've earned if you pull out before the entire term has elapsed.

Is a CD right for you?

Certificates of Deposit can be a great option for anyone looking to make their money work harder. If you're wondering if now is the time for you, ask yourself these two questions:

  • What is my acceptable level of risk?
  • CDs are best for people who want their funds to be safe, secure, and protected with an expected rate of return for the length of the term.
  • What term length would be good for me?
  • If you are going to need the funds immediately after opening the account, a CD might not be the right option for you—a traditional savings account might be a better option since CDs usually have penalties if you make a withdrawal before the term is up.

Ready to open a Certificate of Deposit? Bank of Hawaii can help you understand your options to help you find the account that aligns with your financial goals. Check out our CD specials to learn more and get started.

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