Is the 7% CD real? Yes — but pros say put your money here instead

It’s been a wild year for savers, who’ve seen interest rates go up, up, up on all types of deposit products, including high-yield savings accounts, money market accounts, and certificates of deposit (CDs). 

In fact, the average rate among the top 1-year CDs is 5.10% right now, according to DepositAccounts.com. That’s more than double what it was this time last year — and if the Federal Reserve hikes interest rates again at its September meeting in its ongoing fight against inflation, CD rates could continue to rise. 

The most optimistic analysts have suggested that CD rates could top 7%, and in at least one case, they already have. The Alpena Alcona Area Credit Union in Alpena, Michigan, made headlines for offering 7.19% APY on a 7-month CD. However, it comes with enough caveats that it’s not a realistic option for most savers. For one thing, you must either live, work, or attend school in Michigan. And, the promotional rate only applies to deposits up to $7,000.

Outside of gimmicks like that, it’s unlikely that CD rates will widely top 7%. That’s especially true if the Fed winds down its rate-hiking campaign by the end of the year, as many economists predict. If those predictions bear out, CD rates are likely already at or near their peak.

So what’s a savvy saver to do? With interest rates already the highest they’ve been in 15 years, most people would be better served by shopping around now for a CD with an APY of 5.00% or more — one that comes with fewer restrictions. Here’s how to do it.

The first step toward locking in a high-yield CD: decide what term is best for your situation. CDs guarantee a certain rate of return over a set period of time. The catch is that, in most cases, you must leave your entire deposit in the CD for the full term or else you’ll have to pay an early withdrawal penalty, usually equal to a few months of interest.

In normal times, you’ll find higher rates on longer terms — but these aren’t normal terms. Right now, 1-year CDs will deliver the most bang for your buck. In fact, the very best 1-year CD rates are around 5.35%. Over the course of one year, a $10,000 deposit would earn at least $535 at that rate, possibly more depending on how frequently the bank compounds interest. (And rest assured, as long as the bank is a member of the FDIC, your deposit will be insured up to $250,000.)

There are some circumstances when you might want to opt for a different term, even if it offers a slightly lower interest rate than a 1-year CD. If your goal is to hedge against fluctuations in the market over the next few years (for example, if a recession brings rates down), then you might consider a 3- or 5-year CD.

While not as high as the top APYs on 1-year CDs, the best 3-year CD rates are still upwards of 4.00%, which provides an excellent return over a longer period of time. The best 5-year CD rates are also tipping into the 4.00% range. If you can afford to lock a portion of your money away for that long, a CD that matures after several years will help ensure your money grows consistently even if rates otherwise go down.

CDs aren’t the only deposit vehicle benefitting from the high-rate environment. High-yield savings accounts are also offering APYs upwards of 5.00%, without the commitment that CDs require. 

Online banks tend to offer the highest interest rates since they don’t have the overhead of traditional banks that maintain many physical locations. The best online banks combine high APYs with low (or no) fees and affordable minimum balance requirements (though some of the very best banks, traditional or otherwise, will also offer these benefits).

Just like regular savings accounts, high-yield savings accounts allow you to access your money whenever you need it (although some banks impose a fee if you make more than six withdrawals in a month). You can also deposit additional money whenever you want, so they’re a great place to build your emergency fund or save toward a goal, like a down payment on a house.

It’s easier than ever to find a high-yield savings account that’s right for your needs. When you look at your options online, you can compare APYs, minimum balance requirements, fees, and more without leaving home. And opening a new account is easier than you might think: It only takes a few minutes and some basic information, including your driver’s license or social security number and account details for your current bank.

The short answer: It depends. Right now, rates on 1-year CDs are higher than the rate of inflation. Consumer prices rose 3.2% in July over the previous year, which is well below the return you could get on a 1-year CD. 

The story was very different this time last year, however. Inflation was up more than 9%, while APYs on even the best 1-year CDs were averaging only 2.3%. So what will the story be this time next year? Despite economists’ best efforts to predict the future, no one really knows.

That’s why it’s important to have a diversified portfolio that includes not just CDs for stability and a savings account for liquidity but also investments for long-term growth. Though investing in the stock market comes with risk, it’s the best way to build meaningful wealth over many years.

The upshot? While interest rates are high, it’s a perfect time to reassess where you keep your money and make sure you have a good balance of security and risk — and that no matter where it is, your money is working as hard for you as possible.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].