I'm Planning to Open a 5-Year CD in 2024. Here's Why You Should, Too

The start of a new year is a good time to think about the different financial moves you may want to make in the near term. And one of mine is putting money into a CD while CD rates are strong.

I specifically plan to open a 5-year CD soon, even though rates on them generally aren't as good as the rates you can find for a shorter-term CD right now. But there's a reason I have my eyes set on a 5-year CD.

I want to lock in a great CD rate while I can

A big reason CDs -- and savings accounts, for that matter -- are paying so generously these days is due to the string of interest rate hikes implemented by the Federal Reserve in 2022 and 2023. But as inflation continues to cool, there's a good chance the Fed will start to cut rates.

That may happen to some degree in 2024. And it's even more likely to happen in the years that follow, since interest rates today are quite high. But while lower interest rates are a good thing for borrowers, they're less great for savers, since it means you don't get to earn as much on the money you have in the bank.

That's precisely why I'm looking to open a 5-year CD now. I expect rates to fall quite a bit in the coming years. If I lock in an attractive interest rate now, I won't have to worry about what rates look like in two or three years.

Now to be clear, if you're looking for the best interest rate on a CD in general, you're probably better off sticking to a shorter-term CD. A lot of banks are offering better rates on shorter-term CDs because, like me, they anticipate Fed rate cuts and don't want to offer the best rates for longer-term products.

Case in point: At Capital One, you can get a rate of 5.25% on a 1-year CD. For a 5-year CD, you're looking at 4.10%. (At the time of this writing)

You might think the 1-year CD is a better bet. But remember, in a year from now, a 1-year CD might only be paying 3.75%. A year after that, it might only be paying 2.25%. And a year after that, 1-year CD rates might be down to under 2%.

Of course, this isn't a given. I don't have a crystal ball and I can't predict with any amount of certainty exactly what CD rates will look like in the coming years.

The point, however, is that I expect CDs to start paying less as early as some point during the current year. So I want to lock in a great rate on a longer-term CD while it's available.

It's not a very big risk for me

For some people, putting money into a 5-year CD can be a risky move. If you cash out a CD early, you risk costly penalties. And a lot can happen in five years. You might end up needing money for a move, or a new car. So it's important to make sure you can really afford to commit to a 60-month CD before opening one.

That's something I've already thought through, and I'm not worried. I have several different savings accounts, one of which is my general emergency fund. That savings account has enough cash to cover about a year of essential expenses.

I have a separate account for home and car repairs, since the cost of those can be substantial. And then I have another account for expenses like vacations, furniture, and so forth, which have the potential to be near-term expenses.

The money I'm looking to put into a 5-year CD is separate from all of this. And because of that, I don't feel that making that long a commitment is too risky for me.

All told, I think it's a great time to lock in a 5-year CD. If you're interested in going this route, shop around and see what rates different banks are offering.