3 things to know before opening a long-term CD this March
As we move into March, certificates of deposits (CDs) remain an interesting interest-bearing account option. While the recent rise in inflation and the Federal Reserve's pause on interest rates have made the rate environment a bit murky, long-term CDs offer solid rates and a guaranteed, fixed rate of return that won't change for the next year or more, depending on the term you choose.
However, as with all financial decisions, it helps to get an overall picture of what opening a long-term CD involves if you plan to open one of these accounts soon. So what exactly should you know before opening a CD with a long term this March?
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3 things to know before opening a long-term CD this March
If you plan to open a long-term CD in the coming weeks, here are a few things you should know:
Short-term CDs offer higher rates (but less rate protection)
Heading into March, many short-term CDs offer higher interest rates than long-term CDs. For example, some short-term CDs offer rates as high as 4.45%, while the top rates on a 5-year CD are closer to 4.25%. As a result, you may be tempted to chase the bigger returns from a shorter-term CD. However, it's important to consider that rates might drop by the time your short-term CD matures later this year. After all, economists expect the Federal Reserve to lower interest rates at some point later this year.
So, if you opt for a short-term CD now, it could mature at a time when rates are lower, meaning that if you deposit that money into another CD after maturity, you may have to settle for a lower rate of return. But if you open a long-term CD now, you'll lock in a high rate and continue earning at that rate for the full CD term, no matter what happens with rates in a few months.
Find the top long-term CD rates now.
You may have penalty-free CD options to consider
Many CDs come with an early withdrawal penalty that's charged for accessing your funds before maturity. Not all CDs have this type of penalty, though, meaning that you can access your funds before the account matures without the extra costs. You may have to take a slightly lower rate in return, but the trade-off may be worth it if you think you'll need to tap into your CD funds before the account hits maturity.
That's important right now in terms of inflation. Inflation rose in January for the fourth month in a row, and the rising cost of goods and services could eventually put extra strain on your finances. Opening a penalty-free CD now means that you're earning interest on your money while maintaining access to your funds in case you need to tap into them later.
A long-term CD can grow your tax refund
If you haven't filed your taxes already, you'll likely do so soon. And, if you're expecting a return, this could be a good opportunity to maximize the returns on your tax refund by depositing it into a long-term CD. After all, the average tax refund was $3,050 last year, according to the IRS — so depositing at least a portion of those funds into a long-term CD could pay off. Not only will you earn a high rate of return, but the banks and credit unions that offer the best long-term CD rates will typically have a $1,000 minimum deposit requirement, which the average tax refund would easily cover.
The bottom line
A long-term CD could be a smart bet this March between the high rates these accounts offer and the extra protections you'll get. Before opening a long-term CD, though, be sure to consider how your financial goals align with current rate trends and liquidity needs. While locking in a high rate can provide stability and predictability, short-term CDs and penalty-free options may offer more flexibility depending on your situation. Evaluating these factors carefully will help you make the best decision for your savings.
