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Should you put $5,000 in a 3-year CD? Experts weigh in

A 3-year CD may be a wise place to deposit $5,000 in today's unusual economic environment.  Getty Images

If you have $5,000 in savings outside of what you need for your emergency fund, you may be wondering where you can store that money and earn a meaningful return. In this case, a 3-year certificate of deposit (CD) could be what you're looking for. 

CDs are savings vehicles that typically pay competitive interest rates when compared to savings accounts and other options. And, the returns on CDs are fixed, so no matter what happens to interest rates in the future, you'll continue to earn the same rate for the entire account term. But the tradeoff is that you'll need to leave your money in the CD for the full term to access those competitive fixed returns. Otherwise, you could have to pay for an early withdrawal penalty that eats into your returns.

But there are lots of good options to consider in today's high-rate environment, so is it really worth putting $5,000 into a 3-year CD right now? Here's what experts say about doing so. 

Compare some of the top CD rates on the market now

Should you put $5,000 in a 3-year CD? Experts weigh in

Right now, First Internet Bank of Indiana, Popular Direct and Quontic Bank offer 3-year CDs with leading interest rates of 4.61%, 4.50% and 4.40% APYs, respectively. And, there are lots of other 3-year CD options with rates that rival these CD accounts.

But, today's high rates aren't the only reason the experts say you should put $5,000 into a 3-year CD right now. Other reasons include: 

To lock in today's high rates

"One of the direct benefits of locking in a 3-year CD at a fixed rate would be if rates decreased during the three years, then you would continue to enjoy a higher yield," says John Jones, an investment advisor representative at Heritage Financial, a financial planning firm.

That's important to consider given the current state of the economy. As inflation continues to cool, the Federal Reserve grows more likely to cut its federal funds rate, which could lead to lower returns on CDs in the future. So, by opening a 3-year CD now, you're able to lock in today's high rates. 

"If you are a CD shopper or investor, this is at or very close to the time to lock in the longer-dated options as we will start to see rate regression very quickly," says Matt Willer, managing director of capital markets at Phoenix Capital Markets, an investment management firm. 

When you open a 3-year CD, Willer says, you may earn "more than if you had waited 'til future dates during the rate decrease cycle. So, you're preserving the elevated rate since the alternative will be measurably lower."

Lock in a high rate on a CD today

To keep your money safe

"CDs are amongst the safest places to deploy capital," says Willer. "So, for the risk-averse, the conservative, it's a disciplined and predictable way to grow capital with negligible risk exposure."

So, what makes a 3-year CD a safe place to store your $5,000? Here are a few ways CDs can offer safety: 

  • Protection against rate volatility: CDs offer a fixed, predictable rate of return. This rate is locked in, so you won't have to worry about rate volatility for three years when you open a 3-year CD. 
  • FDIC or NCUA insurance: Most CD accounts offer up to $250,000 in FDIC or NCUA insurance per depositor, per account. That means your money is safe even if the financial institution goes out of business or faces other major issues with liquidity. 
  • Protection against early withdrawals: If you tap into your CD early, you may have to pay an early withdrawal penalty, making it less likely that you'll do so. So, CDs can help keep your money safe from unnecessary withdrawals, as you'll have to carefully consider the pros and cons of tapping into it before your account matures.  

Simplified planning

Ultimately, there are no surprises with a CD. Everything from the account term to the potential returns will be clear from the moment you open it. So, opening a 3-year CD now can help ensure that your money meets the financial goals you've set for three years from now. 

"Finally, there is no ambiguity, you know what you have, you know what you're getting, and you know how long your commitment is, which simplifies planning," says Willer. 

Use a CD to help you achieve your financial goals today

The bottom line

If you have $5,000 and you're not sure where to store it, you may want to consider opening a 3-year CD. Experts say that doing so can preserve today's high interest rates while keeping your money safe. And, since the terms of the account are clear from the start, and the returns are fixed, these types of accounts can be a smart tool to help you achieve your financial goals. Compare today's leading CDs now

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