Savers who want to earn higher yields on their cash have been looking for ideas on how to open a certificate of deposit (CD). With interest rates still high, some of the best CDs are paying APYs of over 5.00% as of April 2024.
But is opening a CD really the right strategy for you? CDs aren’t the best fit for all investors, but there are a few situations where opening a certificate of deposit is the perfect move for your money. Let’s look at a few of the best reasons to open a CD this month.
1. You need steady income with the safety of FDIC insurance
CDs are not exciting high-growth investments — and they’re not supposed to be! CDs are safe and predictable. When you open a CD, you get a guaranteed rate of interest on your savings, and you get the protection of FDIC insurance. Even if the stock market tanks or your bank fails, your CD money will still be safe.
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If you’re retired and need fixed income from your cash savings, opening a CD could be a good choice.
2. You’re saving for a near-term goal
CDs are not a good place to keep your emergency savings. If you might need that cash this month, this week, or today, you should keep that money in a liquid, immediately accessible bank account.
But if you have some cash savings that you know you’re not going to spend anytime soon, CDs can be a good place to park that money. Or if you’re saving money for a near-term financial goal in the next two or three years, like a wedding, a down payment on a house, or a dream vacation, a CD can also be a good choice to provide safety and a relatively high yield.
3. You believe that the Fed is about to cut interest rates
The Federal Reserve raised interest rates aggressively throughout 2022 to fight high inflation, and interest rates have stayed high ever since. As inflation has recently improved, the general consensus among experts is that the Fed is likely to cut interest rates in 2024.
No one knows for sure if or when this will happen. But if you manage to guess the Fed’s next move and time the market correctly (let’s say you believe the Fed will cut interest rates in June 2024), right now could be a great time to open a CD. Opening a CD right now could let you lock in a higher APY than you’d be able to get in a few months, after a potential future interest rate cut.
However, keep in mind that the future is not guaranteed. What if the Fed ends up not cutting interest rates anytime soon, or even raises interest rates? Open a CD because it’s the right fit for your investing goals, not because you “know” for a fact that interest rates are about to go down.
The biggest downside to CDs is that they require you to lock up your money for a certain period of time, and they charge early withdrawal penalties. If you pull your money out of the CD before the term is up, you could lose most or all of the interest you’ve earned.
But for some people, locking up your money could be a good thing. If you struggle to save money, if you like the feeling of knowing that your money is committed to a CD and that you can’t take it out, if you need extra incentives and nudges to leave your money alone and not be tempted to spend it, then a CD’s early withdrawal penalties could be good for you. CDs are not immediate liquid cash like the funds in a savings account, but they have helpful guardrails that keep your money earning interest.
Bottom line
I’m not opening any CDs in 2024 because I want liquidity and flexibility for my cash savings. Most CDs aren’t the right fit for my goals. But CDs could be right for you if you want safe, reliable yields on your savings and you don’t mind the risk of an early withdrawal penalty. And if you want to lock in a high interest rate before possible Fed rate cuts, you might want to open a certificate of deposit as soon as possible.
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