I've Never Been a Fan of CDs. Here's Why I'm Changing My Tune in 2024

Certificates of deposit (CDs) have never seemed like the right fit for my personal finances and savings goals. Sure, there are some advantages to opening a CD: You get FDIC insurance (or NCUA insurance at a credit union) and a fixed rate of interest on your savings. And CDs are some of the safest investments.

But the downside of a CD is that you have to lock up your money, sometimes for years. And until recently, the yields on CDs were so low, it just didn't seem worth bothering. Unlike some investors who love to evangelize about their favorite stocks or asset categories, I was far from being a fan of CDs. Certificates of deposit just seemed like a sleepy backwater of the banking system.

However, in the past couple of years as the Federal Reserve has raised interest rates, certificate of deposit APYs have shot up to the point that CDs might be worth another look.

Here are a few reasons why the best CDs might be a more appealing option for your savings in 2024.

1. CD APYs are high -- and might go down in 2024

No one knows if this is going to happen for sure, but it is widely expected that the Fed might cut interest rates in 2024. If interest rates come down, that means CDs with higher fixed APYs could be a good investment. Today's best CD rates might be at their highest level for the foreseeable future.

For example, the best 1-year CD rates, as of Jan. 27, 2024, were as high as 5.30% APY. If you put your savings into one of those CDs, you'd lock in a 5.30% APY on your savings for one year. In case the Fed cuts interest rates by, let's say, a total of 1% during the next 12 months, savings account APYs will also come down by a similar amount. So you might end up earning a significantly higher APY on your savings by locking in one of the best 1-year CDs today.

Want a longer-term commitment? The best 3-year CDs offer interest rates of up to 4.45% APY as of Jan. 27, 2024. If you believe that the Fed is going to cut interest rates in 2024 and leave them lower for the next few years, locking in a 4.45% APY on your short-term cash could be a smart move.

2. Locking up your money can be good for you

For most of my financial goals, CDs aren't the right choice. Yes, I need cash: I like to have a comfortable emergency fund and enough money on hand to deal with short-term financial goals like home maintenance costs, vacations, or my kids' orthodontic treatments and other healthcare costs. But a CD isn't the right fit for emergency savings because I need fast access to that cash without paying early withdrawal penalties.

Simply put: I don't want to lock up my money in a CD. I love having the flexibility of a savings account, even if the APY is lower than the best CDs. And I've always been passionate about saving; I enjoy the process of watching the numbers get bigger. I can stay on target for my savings goals without having to lock up my savings. But not everyone is able to do this. Some people could use a few extra nudges and guardrails to keep their savings on track.

Committing to a CD might be the right choice for you if:

• You struggle to save
• You're tempted to spend the money in your savings account
• You need an added layer of protection to hold yourself back from blowing through your savings

Sometimes putting your savings in a lockbox, "out of sight, out of mind," can help you stay on target for your savings goals. If your money is committed to a CD for one year or longer, you might be more likely to leave the money alone and let it grow with compound interest.

3. Get creative with a CD ladder

Depending on your financial goals, CDs can be helpful for short- or medium-term investments. If you're saving for something just a few years away -- like a wedding, a down payment on a house, or a dream vacation -- you might want to maximize the yield on your savings by using a CD ladder.

Let's say you have a total of $20,000 of cash savings. You could divide it into five different CDs with a "ladder" of increasingly long terms, such as:

• $4,000 into a 1-year CD at 5.50% APY
• $4,000 into a 2-year CD at 4.85% APY
• $4,000 into a 3-year CD at 4.45% APY
• $4,000 into a 4-year CD at 4.30% APY
• $4,000 into a 5-year CD at 4.30% APY

With a CD ladder strategy, you can avoid putting all your eggs in one basket. You can lock in some long-term APYs and some higher short-term APYs. After one year, your first CD will mature and you'll have $4,000 of cash (plus $220 of interest) ready to put into a new CD or other investments, while your other CDs continue to grow.

Bottom line

When interest rates were near zero, I didn't understand the appeal of CDs. But now that APYs might be at a high point, 2024 could be a good time to open a CD. Consider building a CD ladder to boost your chances of getting the best yield over time.