If You Do One Thing With Your Savings, Consider a CD

If you've got a chunk of cash and no immediate plans for it, you have a few options to earn a return on it. You could put your money into a brokerage account and invest in the stock market, but investing is ideally done over the long term (think several years, at the very least), and you might not want to tie up your money for quite so long -- or risk losing it to the whims of the market. In this case, a certificate of deposit (CD) might be just the ticket.

When you open a CD account, you agree to lock up your money for a set period (often a few months to several years) in exchange for earning a higher annual percentage yield (APY) than you'd usually get on other types of deposit accounts. If you need to withdraw your money early, you'll be penalized by the bank (usually with the loss of a few months' worth of interest). But your money will be safe if you opt for a bank with FDIC insurance.

Right now is a great time to consider opening a CD. Let's discuss why -- as well as when you might want a CD account specifically.

These APYs probably won't last

It's been a wild couple of years for the U.S. economy, starting with the COVID-19 pandemic in 2020. In the wake of that, we saw inflation at a 40-year high, and then watched the Federal Reserve hike interest rates 11 times between spring 2022 and summer 2023. The Fed has opted to leave rates alone at its last few meetings, but this year, we might see it cut rates.

The Federal Reserve doesn't set consumer interest rates on loans and bank accounts, but since banks are impacted by the Fed's actions, the two are correlated. When rates are up (like right now), we get higher APRs on loans and credit cards, and higher APYs on savings accounts, money market accounts, and CDs. Right now, the best CD rates are over 5%, and you can enjoy these yields on shorter CD terms (say, three to 18 months). Longer CD terms (like 5-year CDs) are paying around 4%, precisely because banks expect rates to fall in the near future.

Since inflation has come down since the Fed started hiking rates, rate cuts will likely soon be upon us. So if you want a CD at 5% APY (or better), now is the time to act.

What is a CD good for, anyway?

Perhaps my powers of persuasion have convinced you that a CD is the right fit for your money. But not so fast! It's worth considering what you're hoping to use that money for. Right from the jump, you need to know that a CD is definitely not the place for your precious emergency fund.

You need ready and easy access to that money, because if you find yourself facing an unplanned expense (such as an expensive car repair), you don't want to find yourself penalized in the process of pulling the cash out. And with a CD, you won't be able to take out just the portion of your money you need at the moment, either. For your emergency fund, consider a high-yield savings account, as it is the easiest option. A money market account could also be a good choice, but note that you may need a higher initial deposit to open one.

A CD is best suited for money you need in the not too distant, but not immediate future. Are you planning to buy a home near the end of 2024 (perhaps after mortgage rates have fallen some) and need a safe home for your down payment? Or do you have a pile of cash you've saved for a dream honeymoon and want to protect it and watch it grow? A CD could be an excellent choice for these scenarios.

CDs are a good option if you want to enjoy a high yield and FDIC protection, and don't mind leaving your savings in place for a period. Consider them now, while rates are still up.