Not a Fan of CDs? Here's Why You May Want to Change Your Tune — for Now


There are pros and cons to putting money into a certificate of deposit (CD) as opposed to a regular savings account. The upside of a CD is potentially getting a higher interest rate on your money, and having that rate guaranteed for the duration of your CD’s term. With a savings account, you can start out earning a certain APY only to see it shrink over time.

On the other hand, with a CD, you’re committing to keeping your money in the bank for a preset period of time. And there can be costly penalties for cashing out a CD before its maturity date. Also, while locking in a specific APY on your money can be a good thing, you run the risk of getting stuck with a lower return if interest rates rise after you put your CD in place. For example, if you open a 1-year CD at 4.50% but rates for that same CD term rise to 4.75% a month later, you’re stuck earning less on your money for the remaining 11 months of your CD’s term.

But even if you’re not a big fan of CDs in general, right now is a pretty good time to put one in place. Here’s why.

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Interest rates are only likely to fall from here

Over the past couple of years, the Federal Reserve implemented numerous interest rate hikes in an effort to slow the pace of inflation. And the central bank’s efforts have worked. Though inflation continues to linger, it’s not nearly as problematic as it was back in 2022, when living costs really began to soar.

Because of this, the Fed is likely done raising interest rates, and has in fact signaled that interest rate cuts could happen later this year. As such, now’s really a good time to put money into a CD.

The CD rates that are available to savers today may not be available later this year once rate cuts take effect. So while opening a CD can mean getting stuck with a lower interest rate on your money, that’s unlikely to be the case if you lock in a CD in the coming weeks.

Should your money go into a CD?

If you have savings that are earmarked for emergency expenses or situations, then those funds should sit in a savings account, not a CD. That’s because you need to leave yourself with access to that money at all times. If you put it into a CD and an emergency strikes, you’ll risk a penalty for taking a withdrawal before your CD’s maturity date.

However, if you have money that isn’t part of your emergency fund, and you don’t need it for other near-term goals, then it pays to consider putting it into a CD. What’s more, you may want to consider a longer-term CD while rates remain competitive.

These days, you may be more likely to find a more favorable APY for a 1-year CD than, say, a 4-year or 5-year CD. But in four or five years, the APYs on CDs and savings accounts might pale in comparison to the rates being offered today. So it wouldn’t be a bad idea to open a longer-term CD if that aligns with your savings goals and strategies.

Either way, it’s a good idea to open your next CD before the Fed cuts interest rates. We don’t know exactly when that will be, but 2024 is definitely on the table. So you may want to take action sooner rather than later.

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