Interest rates are rising, but this banking product is still a bad choice

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You may want to put your money elsewhere.

Key points

  • Rate hikes by the Federal Reserve will likely result in higher interest rates at banks.
  • Although it may be beneficial to put more money in 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 raise consumer interest rates directly, since it doesn’t have that power. But when he raises the federal funds rate, which is what banks charge themselves for short-term borrowing, consumer interest rates tend to follow suit.

This is a bad thing from a borrowing perspective. If you want to take out a mortgage this year, you may have to pay more interest. Likewise, the variable interest rate on your credit card could increase in the latter part of 2022, making any balance you are carrying more expensive.

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

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

Interest rates are still relatively low

Bank accounts may soon start paying out 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 what they were in the past. And even if they step it up a notch, they won’t be so competitive in the grand scheme of things.

This is one of the reasons why now is not a good time to open a CD – or at least a longer term CD. Rates have the potential to climb to more attractive levels than they are today, but if you lock yourself into a longer-term CD, you could end up with a lower interest rate than you would get while waiting.

Additionally, many financial experts are issuing warnings about a potential recession. We cannot say for sure if we will experience it and to what extent. But given that, you might want to choose a more flexible place for your money, like a savings account. With a CD, an early withdrawal can mean the loss of several months of interest as a penalty.

Is a short term CD acceptable?

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

Also, if you have a lot of money that you aren’t using and don’t expect to need it for several years, it’s worth considering investing that money in a brokerage account. By doing so, you could secure yourself far better returns than any CD will give you right now.

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