Analysis

2 Reasons High CD Rates Are Bad News for Savers

Right now, you can get a CD paying upward of 5.00% APY. That’s a pretty great deal, considering that for over a decade prior to the pandemic, APYs of 2.00% used to be about the best you could get.

Earning such a high rate may seem exciting, especially since you don’t really take on much risk to earn these returns. Sadly, it’s actually not something you should be happy about. In fact, there are two really important reasons high CD rates are bad news for savers.

1. CD rates are high because of inflation

The first big reason not to be thrilled about such high CD rates is because of the economic conditions that led to the record-high rates.

In the post-pandemic era, inflation — or rising prices of goods and services — has surged. America’s central bank, the Federal Reserve, aims for around 2% inflation each year. In 2022, the average rate of inflation was 8%. In 2021, it was 4.7%, and in 2023, it was 4.1%.

Our Picks for the Best High-Yield Savings Accounts of 2024

APY

up to 4.60%



Rate info

Circle with letter I in it.


You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.


Min. to earn

$0

APY

5.00%



Rate info

Circle with letter I in it.


5.00% APY for balances of $5,000 or more; otherwise, 0.25% APY


Min. to earn

$5,000

APY

4.25%



Rate info

Circle with letter I in it.


See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.


Min. to earn

$0

When prices go up so much, it’s really bad news for savers.

Even the best high-yield savings accounts offer rates hovering around 4.00% to 5.00%. The returns you earn are either not keeping pace with rising prices or beating the inflation rate by a little bit. You aren’t making that much money when you consider the actual increase in your buying power.

These high prices also make it harder to invest in CDs at all. If you’re spending 8% more to buy your groceries, that doesn’t leave much cash to stick in your savings account. You’re much better off with prices rising more slowly, so you aren’t constantly losing ground.

2. High rates could tempt you to invest when there are better places to put your money

All this news about competitive CD rates could prompt you to invest in them out of FOMO, or fear of missing out. You could be lured in by the 5.00% low-risk investment and end up putting money into a CD that really doesn’t belong there.

If you have the cash to spare, it might be a better idea to open a brokerage account instead and invest in an S&P 500 index fund. This is a fund tracking a financial index made up of around 500 of the largest U.S. companies across all industries. It’s produced an average 10% annual return and the risk is pretty low (with a long enough investing timeline), since you’re betting on big business in the U.S.

Unfortunately, investing in the market can feel scary, and CDs offering great rates may seem like a viable alternative. So, some people might pass up a chance to put money in the market when they shouldn’t. If they won’t need the funds for at least three to five years and they have time to wait out any market downturns, they’ll be better off going for the higher returns.

For both of these reasons, today’s high CD rates really aren’t great for savers. Before you decide to take advantage of them, make sure you understand the opportunity cost. And, whatever you do, don’t keep money in investments paying less than the rate of inflation if you can help it. You’ll just see that money’s value erode over time. You have account options, like high-yield savings accounts, that ensure that won’t happen.

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

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