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If you have money you don't need right away but you also aren't ready to invest, then a certificate of deposit, or CD, could be a good home for it. The upside of putting money into a CD is that you'll generally snag a higher interest rate on your cash than what a savings account will pay you. And while you may have to commit to tying that cash up for a preset period of time, that period doesn't have to be too long.
Many banks, for example, offer six-month CDs, so that's an option you can explore if you want more flexibility. You can also look at doing a CD ladder, where you take your available cash, divide it up, and put it into several CDs that mature at different intervals.
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Meanwhile, CD rates have been on the rise this year in the wake of rate hikes on the part of the Federal Reserve. And since the Fed isn't done raising rates, there's reason to believe that CDs might pay even more generously in 2023.
Should you plan to open a CD in the new year?
For years on end, CD rates were notably stingy, as were savings accounts rates. But over the past number of months, CD rates have increased, making them a more appealing option for savers.
Because the Federal Reserve still has a major inflation problem on its hands, it's likely to continue raising interest rates until inflation levels drop to a significant degree. As such, we could be in for more months of rate hikes -- and higher CD rates to follow.
That's why you may want to plan on putting money into a CD in 2023. There's a solid chance you'll be able to get a decent rate of return on your money.
That said, you shouldn't put your emergency fund into a CD. Your emergency fund is money you should have easy access to at all times. If you cash out a CD before it matures, you'll be penalized, the exact amount of which will depend on your bank. But usually, cashing out a CD early means losing several months of interest. If you keep your emergency fund in a regular savings account and wind up needing to tap it, you won't be penalized for doing so.
Should you invest your money instead?
CDs might pay generously in 2023. But you might manage to generate an even higher return on your money by investing it in a brokerage account.
Doing so, however, carries risk, so you'll need to think about what you want to do with that money. If it's cash you're planning to not use right away, but you might want to use in a few years, then investing generally isn't the best way to go. But if you're certain you won't need that cash for a decade or longer, then that gives you plenty of time to ride out a stock market downturn.
Plus, stocks are down right now, and there's a good chance they won't recover in the next few weeks. So if you have extra cash and decide to invest it at the start of 2023, you might manage to scoop up some quality stocks at a discount. And that could set the stage for some nice gains in your portfolio over time.
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