The financial industry has changed over the course of many years. With the advent of digital technology and online banking, it seems easy for us to handle our money. However, some of the traditional banking practices still continue to hold strong even today.
One of them is Certificates of Deposit – or CDs. As of 2024, they are still at the forefront of banking. We will explain why in this guide right now.
Why were CDs overshadowed by other banking products in recent years?
One of the reasons why CDs have been overshadowed by everything else in banking was because…well, all things digital. People were keeping track of their finances with a touch of an app or a few clicks of a mouse.
This also included monitoring their savings – especially with a high yield certificate account like the kind GreenState Credit Union offers. Could you track the progress of a CD digitally?
That might depend upon the financial institution that offers it. Other than that, CDs have come roaring back. The reason could be that people might be more comfortable putting money in something that has more stability and less risk.
This could be a smart move for many who are serious about their financial goals. At a time when people hope that inflation will subside, it’s unclear when or if it will happen. And with longer term CDs that have higher interest rates, they are becoming a bit more of an appealing option for those who want to protect an amount of money they don’t want to lose.
The rates are going up
One of the hallmarks of CDs is their interest rates. They are a contributing factor to the amount of money you accrue after putting an initial deposit on them. However, there’s a caveat to be aware of when the banks finally cave to the pressure.
For fixed rate CDs, a rate hike could hurt them. However, those with variable rate CDs will be able to enjoy them, ensuring that they earn more money in the process. For those who have yet to make a decision on CDs, this reason alone will give them pause on which type to choose and why.
It’s unclear how many banks have already raised interest rates on CDs. But there’s a good chance that many banks will at some point in 2024 in an effort to combat inflation. So far, there’s a lot of procrastination on the end of many financial institutions.
And it’s leaving those interested in fixed rate CDs on shaky ground. If you’re considering the idea of CDs, consider one at your own risk. Despite the fact that the CD itself is a low-risk investment.
If you have any concerns about potential rate hikes and CDs, it may be a good idea to speak to someone at your local bank.
CDs and Inflation: A Minefield?
Rising inflation can pose a threat to CDs. Another reason why people may be hesitant in putting their money in one (at least not yet). The reason for this is that the interest rate on a CD won’t be ahead of inflation.
Meanwhile, the money you have will lose its purchasing power. You’re at risk of a better paying investment. However, that doesn’t mean you should avoid CDs altogether.
Don’t forget, you still have variable-rate CDs as a viable option. That’s because you’re paid based on the prime rate. You might also put your money in CDs that are liquid (believe it or not, they exist).
While these seem pretty good in terms of being viable alternatives, let’s not forget that there are downsides. Specifically, variable-rate CDs have a lower rate compared to their traditional counterparts. Even worse, if inflation free-falls, your rate will go along with it.
If you are able to get a bump-up (or liquid CD) from your local bank, consider yourself lucky. Those types of CDs have nowhere to go but up. So at least you have a good idea to put money in certain CDs without worrying about having to miss out on bigger returns due to inflation.
Traditional CDs might not cut it in times of uncertainty. So it may be the variable-rate CD’s time to shine, despite sporting a much lower interest rate. Still, it’s better to be prepared for no slow down than a slow down of inflation.
Conclusion
CDs are being pushed by banks once again – long after they may seem like a forgotten relic. However, knowing what you know now thanks to this guide, you might have a good idea of which CDs will benefit you in the long run.
While this shouldn’t be mistaken as professional financial advice, it may be a good idea to consider a variable CD if you believe inflation has no signs of slowing down any time soon. But if inflation subsides as some want, only then could it make sense to put money in a traditional fixed-rate CD.
