Interest rates on certificates of deposit (CDs) have been sky high over the last few years. But rates on savings accounts have been high too, so people haven’t had that much incentive to lock their money away for months or years in a CD.
That looks to be changing, though. Many expect savings account and CD rates to fall later this year into 2025 as inflation cools. Some see this as a sign that now’s the time to lock in a high CD rate before they’re gone. But here are a few factors to consider before you do that.
The advantages to opening a CD right now
Opening a CD right now enables you to lock in a competitive CD rate that could last for years. It’s possible you could earn even more with one of these over the next few years than you could with a high-yield savings account if savings account interest rates fall sharply.
Say you invest $10,000 in a 1-year CD with a 5.00% APY. That would earn you $500 in a year. If you’d kept that $10,000 in a savings account that earned 5.00% for one month and then 4.00% for the remaining 11 months of the year, you’d only wind up with about $408 in interest for that year.
Our Picks for the Best High-Yield Savings Accounts of 2024
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American Express® High Yield Savings  APY 4.25% Rate info 4.25% annual percentage yield as of August 14, 2024 Min. to earn $1 Member FDIC. |
APY 4.25% Rate info 4.25% annual percentage yield as of August 14, 2024 |
Min. to earn $1 |
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UFB Portfolio Savings Account  APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you’ll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. Min. to earn $0 Member FDIC. |
APY 5.15% Rate info To ensure you keep getting the highest rate at UFB, you’ll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. |
Min. to earn $0 |
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CIT Platinum Savings  APY 5.00% APY for balances of $5,000 or more Rate info 5.00% APY for balances of $5,000 or more; otherwise, 0.25% APY Min. to earn $100 to open account, $5,000 for max APY Member FDIC. |
APY 5.00% APY for balances of $5,000 or more Rate info 5.00% APY for balances of $5,000 or more; otherwise, 0.25% APY |
Min. to earn $100 to open account, $5,000 for max APY |
Short-term CD rates pay the highest APYs right now, which is not typical. This might seem like your best option, but it depends on how long you can leave the money untouched.
Continuing our example above, say you invested $10,000 in a 1-year CD with a 5.00% APY. You’d have $10,500 at the end of that year. Then, you invest in another 1-year CD with a 4.00% APY and a third 1-year CD with a 3.00% APY. At the end of three years, you’d have $11,248. But if you’d invested in a 3-year CD with a 4.50% APY right now, you’d have $11,412 at the end of three years.
The disadvantages to opening a CD right now
The obvious drawback to opening a CD is that you’re locking your savings away for an extended period of time — sometimes years. You can technically take your money out early if you need to, but you’ll pay an early withdrawal penalty for doing so.
An early withdrawal penalty usually doesn’t cost you any of your principal (unless you withdraw very early in your CD’s term), but you will come away with a lot less in interest than you would’ve gotten by leaving the money in the CD until maturity. So make sure you choose your CD’s term carefully if you decide to go this route.
CDs can also be the wrong choice for those who don’t plan to use their money for decades. These people can often earn more on their savings by investing it rather than keeping it in a CD. Even the best CD rates generally don’t beat the inflation rate, so your buying power could decline even while the dollar value of your account increases.
If you don’t think a CD is a good fit for you, consider moving long-term savings to a retirement account or taxable brokerage account and keep the rest in a high-yield savings account. Your savings account interest rate will ebb and flow over time, but at least you’ll be free to access this cash whenever you need to.
These savings accounts are FDIC insured and could earn you more than 10x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you more than 10x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
