Is now a good time to buy a CD?

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certificate of deposit
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Remember the days in the aftermath of last decade’s Great Recession when rates on certificates of deposit (CDs) were anemic — barely 1% — as a national average?

With the economy going strong and interest rates rising, CD rates are again climbing. According to BankRate.com, a small handful of banks are paying between 2.25% and 2.50% for a one-year CD with minimum deposits ranging anywhere from $500 to $10,000.

That has a lot of savers wondering if they should be buying CDs right now.

RELATED: Traditional vs. online banks: This chart shows how $5,000 can grow over 10 years

Are CDs a good investment right now?

First, let’s take a step back. Let’s define what the purpose of a certificate of deposit is.

A CD is a contractual agreement you enter into with a bank. You give them access to your capital for a set term — typically anywhere from one month to 60 months (five years) — and they reward you with what’s traditionally been a higher amount of interest than you’d get in simple savings at a traditional bank.

As a general rule, the longer the CD term you select, the more interest you’ll get.

The Federal Deposit Insurance Corporation (FDIC) does a weekly tally of CD rates across the banking industry. At this moment, the national average for a one-month CD is 0.09%. That’s taking into account a cross-sampling of thousands of CD rates from big banks, regional banks, community banks and credit unions across the country. The average five-year CD, meanwhile, is 1.05%.

CD rates from the FDIC
courtesy of the FDIC

Another thing to keep in mind about CDs is that there are early withdrawal penalties associated with them.

So let’s say in theory you took out a 60-month CD, then ran into a family emergency a year down the road and you needed immediate money. Historically, you would have to forfeit the last 90 days of interest if you needed to cash out before the CD “matured.”

Giving up 90 days of interest used to be a severe penalty when CD rates were higher. Today, however, it’s really nothing because interest rates are still relatively low by historical standards.

CDs have traditionally appealed to people who are on fixed incomes or are afraid of stocks and looking for more money on their savings. Yet while CDs can have their place in your financial arsenal, money expert Clark Howard says the rising interest rate environment dictates a different course of action for your savings right now.

“With interest rates going up and more rate increases expected before the end of the year, you’re better off just putting the money in a savings account with one of the online banks that’s paying close to 2% now,” the consumer champ says. “The spread between those savings account rates and the CD yields just isn’t big enough to justify locking your money up for any length of time.”

Indeed, online banks can offer you a solid return on your savings that dwarfs what traditional banks will pay on simple savings. Some of the bigger players in the online bank space include Ally Bank, American Express, Capital One 360, Discover Bank and FNBO Direct.

Here’s a look at how what several online banks are paying in interest right now stacks up against what the traditional banks pay.

Bank of America Chase Citi Wells Fargo Ally Bank American Express CapitalOne 360 Discover Bank FNBO Direct
0.03% 0.01% 0.06% 0.02% 1.75% 1.75% 1.75% 1.75% 1.75%

So, you can lock your money up in a CD for one, two, three, four or even five years and earn just slightly more than you would in an online savings account or you can open one of those online savings accounts and wait for rates to rise to the point where CDs are a better deal.

Money expert Clark Howard says that right now, he wouldn’t invest in a one-year CD unless the rate was 1/3 of a point higher than what you can get in an online savings account. For a two-year CD, he needs it to be 3/4 of a point higher, and for five-year CD, 1.5 points higher than the savings rate.

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