If it seems like everyone you know is opening a CD these days, there’s a reason for that. CD rates are among the highest they’ve been in years, with shorter-term CDs still offering APYs of 5% or even a little more.
You may be inclined to try to snag the highest CD rate you can this July — before rates start to fall. But here’s why you may not want to chase the highest CD rate this month.
Thinking long-term could work to your benefit
CD rates are up right now because the Federal Reserve spent much of 2022 and 2023 raising interest rates. The Fed needed to do that to pump the brakes on rampant inflation. And the Fed’s efforts worked to a large degree, leading to prices rising at a slower pace this year.
Since the Fed has made progress on inflation, it could soon start cutting interest rates. We don’t know exactly when that’s going to happen. But it’s fair to assume there will be at least one rate cut in 2024, and possibly more.
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Once the Fed begins to cut rates, CD rates should follow suit. This doesn’t mean that a single rate cut is going to take a 5% APY CD down to 4% overnight. The Fed’s rate cuts are likely to be gradual.
But once those rate cuts start, CD rates will gradually fall. And that’s why your best strategy for opening a CD this July may be to go for one with a longer term, like 36 months or longer.
For example, you could find a 12-month CD with a 5% APY. But a 36-month CD only has a 4% APY. So if you’re depositing $10,000, that’s a difference of $100 in interest your first year.
But remember, with the 36-month CD, you get that 4% APY for three years. In a year from now, the best 12-month CD rate available may be just 3%. And a year after that, it may be 2%. We don’t know. So all told, you might earn more interest on your money with a 36-month CD.
To put it another way, you’re guaranteed $1,249 in interest if you open a 36-month CD at 4%. All you know is that with a 12-month CD, you’re guaranteed $500 your first year. From there, it’s anyone’s guess.
The one move to make before opening any CD
A longer-term CD could be the best strategy to focus on this July. But before you open any CD, make sure you don’t need the money you’re about to deposit for emergency fund purposes. If so, sticking to a regular high-yield savings account is a safer bet.
Also, think about your financial goals. If you think you want to buy a house in three to four years, then a 36-month CD could be a good place to grow your down payment. It wouldn’t be smart to invest your down payment in the stock market because you might have too short a window to recover from a downturn.
On the other hand, if you think you’ll be ready to buy a home in about a year to 18 months, then you certainly don’t want to stick your down payment in a 36-month CD, because you could end up facing large penalties for an early withdrawal.
So while opening a longer-term CD could be a good choice this month, make sure that doing so actually fits with your financial needs and goals.
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