Why a CD May Be Your Best Friend as Interest Rates Drop

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It may be tough to think of a financial product in the same vein as a good friend, but it occurs to me that the two share several traits. Whether you've dipped your toe in the certificate of deposit (CD) pond with a 1-year CD , or you've been toying with the idea, here's what I think these interest-earning beauties have in common with a good friend.

Friends are faithful

There's no bait and switch when you invest in a CD. For example, you could open a high-yield savings account with a solid rate, but there's no guarantee that the initial rate will stay the same. In fact, most financial products are pretty fickle and rates tend to change as the wind blows.

For example, as the Federal Reserve continues to decrease the prime interest rate (the rate at which banks loan money to each other), you can also count on the rates paid on savings and other deposit accounts to drop.

Not so with CDs. The rate you're promised when you open a CD is the rate you'll receive until the day your CD matures. Whether that's three months or five years from now depends on your chosen term.

If you're looking for a place to earn a steady, dependable rate while inflation cools and consumer interest rates drop, click here to check out a selection of the best CD rates available now .

Friends want what's best for you

Another thing CDs have in common with a good friend is wanting what's best for you. Lately, I've been saving money to cover any extra medical costs my husband and I may face when he retires. I'm trying to make the most of that money by putting it into a 5-year CD where I won't be tempted to touch it until it matures.

But let's say that CD rates have plummeted in five years, and all I want to do when my current CD matures is to cash it out. That's OK. I have that option. Maybe there will be a better place to keep (and grow) those funds.

However, if the annual percentage yield (APY) on CDs is high again, I can always roll the principal amount and any interest earned over into a new CD. In other words, I can do whatever is best for us when the time comes.

Good friends welcome you back at any time

I don't know about you, but I typically feel nervous when I do anything for the first time. For example, the first time I invested in a CD, I was unsure of the rules and was scared that I would mess things up. It may have been a silly worry, but it felt legitimate all the same.

Another time, when we were still young, I remember desperately needing the money I'd invested in a CD to cover an emergency expense. This was back before I got serious about building an emergency fund, and I didn't know what else to do other than cash the CD out and take a penalty for an early withdrawal. I can still remember how sick I felt about that penalty.

Fortunately, like a good friend, I've always been welcomed back by CDs. As rates have risen and fallen over the decades, I've learned how helpful it can be to harness the fixed rates offered by CDs. It's not as though there's a "naughty list" somewhere showing who made early withdrawals in the past.

Each time I buy a new CD, it's a brand new arrangement. I don't drag the mistakes of the past with me, and no one seems to remember them (except me).

If you're looking for a safe place to park money while the economy finds its footing, you may want to learn more about how a CD works and what it can do for you. If nothing else, you'll learn how safe and warm a CD can feel when everything else feels shaky. You know, like a friend.

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