Interest Rates Are Rising, but This Banking Product Is Still a Poor Choice

Image source: Getty Images

You may want to put your money elsewhere.

Key points

• Rate hikes on the part of the Federal Reserve will likely translate to higher interest rates at banks.
• While it could pay to put more money into a savings account, you may want to keep your options flexible.

The Federal Reserve is moving forward with a series of rate hikes this year. That doesn’t mean the Fed will be directly raising consumer interest rates, since it doesn’t have that authority. But when it raises the federal funds rate, which is what banks charge each other for short-term borrowing, consumer interest rates tend to follow suit.

That’s a bad thing from a borrowing perspective. If you want to take out a mortgage this year, you could get stuck paying more interest on it. Similarly, the variable interest rate on your credit card could rise during the latter part of 2022, making any balance you’re carrying more expensive. 

But rising interest rates are a good thing from a banking perspective. That’s because savings accounts, for example, might start paying more during the second half of 2022. And given that inflation is wreaking havoc on so many people’s budgets, it may not be a bad idea to stash away some extra cash in the bank.

But while it may be a good (or at least a better) time to put money into a savings account, you may want to think twice before opening a certificate of deposit, or CD. Here’s why.

Interest rates are still relatively low

Bank accounts might soon start paying more money — and some already are. But even so, it’s important to recognize that today’s savings rates are still very, very low compared to where they’ve sat in the past. And even if they tick upward a notch, they won’t be all that competitive in the grand scheme of things.

That’s one reason why now’s not a great time to open a CD — or at least a longer-term one. Rates very much have the potential to climb to more attractive levels than where they are today, but if you lock yourself into a longer-term CD, you could end up with a lower interest rate than you’d get by waiting.

What’s more, many financial experts are sounding warnings about a potential recession. We can’t say for certain whether we’ll experience one, and to what extent. But given that, you may want to choose a more flexible place for your money, like a savings account. With a CD, an early cash out could mean losing several months’ worth of interest as a penalty. 

Is a shorter-term CD okay?

If you’re able to find a six-month CD paying a lot more interest than a regular savings account, then that may not be such a bad choice. But otherwise, you shouldn’t rush to pump money into a CD right now. What you gain in the form of a slightly higher interest rate, you lose in the form of having less flexibility with your money, and that’s really not worth it.

Plus, if you have a pile of money you aren’t using and don’t expect to need for several years, it pays to look at investing that cash in a brokerage account. By doing so, you could set yourself up with far better returns than what any CD will give you right now.