There are benefits and drawbacks to putting money into a certificate of deposit (CD). On the plus side, you'll often be looking at a higher interest rate on a CD than a savings account. And also, the interest rate on your savings account can change from week to week. But when you lock in a CD, you're guaranteed to continue receiving the rate you signed up at for the length of your CD's term.
Of course, the downside of putting money into a CD is that you'll be penalized for withdrawing your money early. The exact penalty will depend on your bank, but three months of interest is a common penalty for cashing out a 12-month CD before it comes due. And also, when you put money into a CD, you commit to that day's rate. But if rates rise a week or so later, you're stuck, whereas with a savings account, your interest rate simply adjusts upward.
If you have money you don't need for near-term goals or emergency expenses, then now's actually a good time to start thinking about opening a long-term CD -- say, one with a 48- or 60-month term. And there's a big reason why.
Lock in that rate before interest rates fall
The main reason CDs are paying so generously right now is that the Federal Reserve has raised interest rates numerous times since early 2022 to cool inflation. Of course, an unwanted side effect of those rate hikes is higher borrowing rates for loans and credit cards. But savers at least get to benefit.
At this point, though, it looks as if the Fed is done raising interest rates. In fact, the central bank actually opted to pause its interest rate hikes at its last three meetings. And the Fed has also indicated that it may be looking at cutting rates at some point in 2024.
That would be a good thing for consumers, many of whom are buckling under the weight of expensive credit card and loan interest rates. But it could also lead to lower CD rates, as well as lower interest rates in savings accounts.
That's why you may want to open a longer-term CD in the coming weeks. Once the Fed cuts rates, CD rates are apt to fall. If you open a long-term CD soon, you can lock in a generous rate for many years.
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
Can you afford to part with the money?
It's one thing to lock some cash away in a 1-year CD. A 5-year CD is a much bigger commitment.
Before you open one, ask yourself:
- Am I happy with my emergency fund, or should I boost it?
- Do I have near-term goals I might need cash for?
- Will I have big expenses to pay for in three or four years, like college tuition or a new car?
If you're confident you can afford to tie up your money for a lengthy period of time, then now's a really good time to open a long-term CD. But if you're not sure you won't need that money, then you're better off sticking to a shorter-term CD, or even just keeping your money in a regular savings account.
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FAQs
(NewsNation) — With the Federal Reserve signaling multiple rate cuts in 2024, yields on certificates of deposit (CDs) may also go down, which means now could be a good time to lock in higher rates. A CD is a type of savings account offered by a bank that earns interest on a lump sum of money over a fixed period.
Should I lock in longer term CD rates now? ›
For example, if you don't need the liquidity generated through CD laddering, locking in a long-term rate could make more sense. While recent inflation data suggests that the Federal Reserve could wait a while to make rate cuts, experts still expect interest rates to start falling at some point in 2024.
Why should you choose a longer term CD? ›
One benefit to opening a long-term CD is that you'll have a fixed interest rate for a longer timeframe than a short-term CD. This means you'll earn more interest on your account because you'll have it locked in longer. You also won't have to worry as much about CD rate fluctuations.
Should you lock in a 5 year CD? ›
Reasons To Avoid Locking Your Money Up
In that case, parking your money in a CD means you may wind up with a lower return than you would earn with a high-yield savings account. Jones points out that another downside to CDs is lack of liquidity, along with the potential for tax ramifications.
Will CD interest rates go up or down in 2024? ›
Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on April 30. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.
Can you get 6% on a CD? ›
Finding reliable 6% CD rates
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
What is the disadvantages of the longer term CD? ›
Face potentially large early withdrawal fees: The longer the term, the larger the penalty for making a principal withdrawal before the CD's maturity date. The early withdrawal penalties for CDs typically expressed as a certain amount of months' worth of interest.
How to avoid tax on CD interest? ›
If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.
Is now the time to buy long-term CDs? ›
Overall, long-term CDs could be a good investment for those who want to lock in guaranteed returns at a relatively high rate in early 2024. But as the year progresses, if interest rates fall as expected, then long-term CDs could lose some of their appeal.
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
Will CD rates stay high in 2025? ›
Also keep in mind that snagging the highest APY isn't the only way to win with today's CDs. Since CD rates could fall much further in 2024 and 2025, locking in a rate soon that's guaranteed for a year or more down the road could be a smart move.
What is the interest rate forecast for 2024? ›
Expert predictions for mortgage rates in 2024
In Fannie Mae's latest rate forecast, the government-sponsored enterprise said it expects 30-year fixed rates to end 2024 at 6.4%.
What is a Jumbo CD? ›
A jumbo CD is a certificate of deposit that traditionally requires a minimum deposit of $100,000. Some banks and credit unions offer jumbo CDs with lower minimums, such as $25,000. If that sum is far higher than the right amount for you to put into CDs, you can skip these CDs.
Why should you put $5000 in a 6 month CD now? ›
While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.
What is the interest rate prediction for 2024? ›
NAR: Rates Will Decline to 6.5% The National Association of Realtors expects mortgage rates will average 6.8% in the first quarter of 2024, rising to 7.1% in the second quarter, according to its latest Quarterly U.S. Economic Forecast.
