Did You Miss the Boat on Opening a CD Before Rate Cuts? Here’s What to Do Now

Before the Fed cut interest rates by 0.50% on Sept. 18, savers had a golden opportunity to open a certificate of deposit (CD). If you had opened a long-term CD (like 12 months or longer) right before the Fed rate cuts, you might have been able to lock in a 0.50% higher APY than is available now.

Think of it this way: Getting 0.50% higher yield on a $10,000 deposit in a CD for 12 months would have earned you an extra $50 of interest income.

However, CDs aren’t the best choice for every person’s cash. And the good news is, even if the Fed keeps cutting interest rates for the rest of 2024 and into 2025, you still have good account options for your savings.

Let’s look at a reason why you shouldn’t feel bad about not opening a CD before the Fed rate cuts, and learn what to do with your cash instead.

High-yield CDs have one big downside

It’s true that if you had timed the Fed’s decision-making perfectly, you could’ve earned an extra 0.50% APY on a CD. But CDs have one big downside to go with those temptingly high fixed APYs: When you open a CD, you have to lock up your money.

That’s right. CDs won’t let you take your money out until the end of the term. If you take your cash out too soon, you have to pay an early withdrawal penalty that can gobble up most (or all) of the interest you were hoping to earn.

Is losing the flexibility of how to use your cash worth an extra 0.50%? For many Americans, I would vote no. Most Americans don’t have enough cash to make a CD worthwhile. The typical American has $8,000 of cash in the bank, including checking accounts and savings accounts.

Unless you have tens of thousands or hundreds of thousands of dollars to put into a CD, unless you’re so financially secure that you are 100% sure you won’t need to access your CD cash until the term is up, in my opinion, CDs are too risky. The risk of having to pay that early withdrawal penalty is not worth the slightly higher yield.

What to do instead of opening a CD: Just keep your emergency fund and other short-term cash savings in a high-yield savings account or money market account. The best high-yield savings accounts give you similarly high APYs compared to the best CDs, and you can take your cash out anytime without penalty.

Want decent short-term yields? Buy bonds

Opening a CD can be a good move if you want to lock in a fixed APY on your savings. Even if interest rates go down while your money is in the CD, your rate of interest earnings will stay the same.

For example, if you open a 2-year CD with a 4.00% APY in September 2024, your CD will keep earning that same 4.00% APY for the next two years, even if the Fed cuts interest rates by another 1.50% during that time.

But CDs aren’t the only game in town for earning a decent yield on medium-term savings. If you’re willing to tolerate some risk and want easier access to your cash, you can invest in bonds.

What to do instead of opening a CD: Choose a low-cost, diversified bond index fund and invest in a mix of government and corporate bonds. For example, the Vanguard Total Bond Market ETF (BND) has delivered year-to-date returns of 4.83% (market price) as of Sept. 20, 2024. The Wealthfront Automated Bond Portfolio was earning 5.16% variable APY as of Sept. 10, 2024.

But keep in mind that bonds are not risk-free. Bond prices and yields can go down as well as up; unlike opening a CD, when you invest in bonds, exact returns are not guaranteed.

But if you like the idea of earning a decent yield on your savings for the next year or two or three, without the early withdrawal penalties of CDs and without the volatility and higher risks of stock investing, investing in bonds can be a good alternative to CDs.

Bottom line

It’s not too late to move your cash savings, even if you missed your chance to lock in a high-yield CD before the Fed rate cuts. If you can truly afford the risk of having to pay early withdrawal penalties, the best CDs are still paying pretty decent APYs (4.10% to 4.50% APY for a 1-year CD) and are worth looking into.

But if you want alternatives to CDs, you could consider investing in bonds — or just open a safe, reliable, liquid savings account.