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Why You Shouldn't Be in Any Big Rush to Open a CD


Just a few short months ago, most Wall Street experts were saying that the Fed was right on the verge of cutting interest rates. This expected interest rate cut helped spark a surge of curiosity about certificates of deposit (CDs), as savers looked to lock in a high APY before interest rates came down.

After all, if you open a CD right before interest rates go down, that can be a great financial move! You get to keep the higher interest rate on your CD, while everyone else has to settle for lower interest rates on bank savings accounts.

But based on recent developments in the economy, and a few other persistent drawbacks to CDs, opening a CD is not a slam-dunk “must-do” decision. Let’s look at a few reasons why you shouldn’t be in any big rush to open a CD.

1. The Fed keeps not cutting interest rates

Here’s the problem with Wall Street experts: they don’t always (or often) get it right. A few months ago, “everyone” thought that the Fed was going to cut interest rates, but the past few months of inflation data and economic performance have undermined that theory. Inflation is still too high, and the economy too strong, for the Fed to cut interest rates.

As of April 20, 2024, it appears that the Fed might not cut interest rates anytime soon. This fast-shifting conventional wisdom about interest rates is causing confusion and disorder in many investors’ strategies — from bond prices to stock prices, to the APYs on CDs and savings accounts.

If the Fed doesn’t cut interest rates in the next few months, this could make CDs a less attractive place to put your savings today. You can’t lock in a high rate if the high rates stay high.

What you should do instead of opening a CD: If you were trying to time the market on interest rates and waiting to open a CD until you could guess the Fed’s next move, you might be waiting a long time. If interest rates do not get cut, your locked-in APY on a CD might not be such a great maneuver after all. Instead of a CD, you might as well just use one of the best savings accounts — with APYs as high as (or higher than) the best CDs.

Keep in mind that bank savings account APYs are not fixed; if interest rates ever get cut, bank savings account interest rates will go down, too. But until or unless the economy goes into a shocking slowdown, the Fed seems to be holding steady on interest rates.

2. Are you really ready to lock up your money?

I’m not a big fan of CDs for a few reasons. Along with the debate about trying to outthink the Fed, there’s an even bigger downside to CDs: CDs require you to commit your money for a specific term of time. And if you have to take your money out, you will owe an early withdrawal penalty that can gobble up most (or all) of the interest income you’ve earned.

People often open a CD with a high degree of confidence that they won’t need that cash for the full duration of the term. But what if your situation changes, and you suddenly need that CD money as part of your emergency fund?

Bank savings accounts do not force you into these predicaments. With a savings account, your money is liquid and you can take all of it out any time (as long as you don’t exceed the limits on the number of monthly withdrawals). And you get to keep every dollar of interest that you earn (less taxes, of course).

What to do instead of opening a CD: Again, just put your cash into one of the best savings accounts or money market accounts. You’ll get an APY that’s almost as good (or better) than CDs, and without the early withdrawal penalties. Or if you find a great deal, choose a special type of CD called a no-penalty CD (but the APYs on no-penalty CDs might not be as good as what you’d get from a savings account or money market account).

3. What if interest rates go up?

It seems unlikely, but it could happen. If the Fed keeps on not cutting rates like everyone thought they would, if inflation gets hotter, it’s not inconceivable to think that rates (and APYs on CDs) could go even higher later in 2024. And in case interest rates go up in the next few months? Your patience in waiting to open a CD will be rewarded.

What to do instead of opening a CD: Just leave your cash parked in a safe, liquid, high-yield savings account or money market account. If interest rates go up in 2024, those accounts’ APYs will also go up. Again, even if interest rates go up, that still doesn’t mean a CD is the best choice. You have lots of good options for places to keep your cash.

Bottom line

Uncertainty about interest rates should make you hesitant to open a CD now. There’s no rush. In case interest rates stay at their current level, or even go up, opening a CD right now might not turn out to be the best financial decision. Instead, consider leaving your cash in a bank savings account or money market account that’s earning 5.00% APY (or higher).

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