Why CDs Are Still a Good Investment After the Fed Interest Rate Cut
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There's a reason so many people rushed to open CDs in 2024. For much of the year, 5% CD rates were the norm. And who wouldn't want a return like that given the almost risk-free nature of CDs? (The "almost" is that CDs do impose early withdrawal penalties. But if you leave your money alone, those are avoidable.)For months, there's been talk of the Federal Reserve cutting interest rates. And on Sept. 18, the central bank finally took action by lowering its benchmark interest rate by half a percentage point.In light of that, you might struggle to find a 5% CD. In fact, 5% CDs began disappearing ahead of an official rate cut. And since the Fed isn't done lowering rates, CD rates could continue to decline between now and the end of year, and also into 2025.If you're wondering whether CDs are still a good investment, the answer is a bit complicated. Here's what you need to know.Things haven't changed all that much with CDsIt's true that you might struggle to find a 5% CD now, but it's not as if CD rates suddenly dropped from 5% to 3% overnight.If you look around, you might easily find a CD that will pay you somewhere in the ballpark of 4.50%. And you may be able to snag an APY that's not so far below 5% if you do your research. All told, that's not a huge difference compared to 5%.For context, if you open a 12-month, $5,000 CD, at 5%, you're talking about earning $250 in interest. Otherwise, here's what you're looking at:APYInterest Earned After 12 Months4.75%$237.504.50%$2254.25%$212.50Data source: Calculations by author.Even if we only assume a 4.25% APY on a 12-month CD (and most are still paying more), you're talking about a difference of $37.50 in interest income over the course of a year.And sure, that amount of money could pay for a takeout meal or a sweater. But $37.50 isn't going to change your life.So all told, if a CD was a worthwhile investment for you before the Fed's recent rate cut, then it's still a good investment for you today. However, it's not a given that a CD is the right place to put your money.It's a matter of your investment timelineA CD is a great place to put your money for a few years or less. But if you're talking about money you may not need for 10 years or more -- say, because you're saving it for something like college or retirement -- then investing it probably makes more sense.Over the past 50 years, the stock market has delivered an average annual 10% return, accounting for strong and weak years. If you invest your money for 10 years or more, there's a good chance you'll end up with a similar return. In that case, the difference between what a CD pays you versus a stock portfolio could be a life-changing amount, as opposed to $37.50.If you invest $5,000 in stocks over the next 20 years and score a 10% annual return in your portfolio during that time, you'll grow your balance to $33,637. If you leave it in CDs that pay you 4.50% (which is very unlikely, but we'll stick with it for this example), you're looking at $12,058 instead. That's a difference of $21,579, which is most certainly substantial.All told, CDs are still a smart place to put your cash on a short-term basis. But if you have a longer window to work with, investing your money is a much better bet -- regardless of the Fed's recent rate cut.Alert: highest cash back card we've seen now has 0% intro APR until nearly 2026
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