Real-Life Success Stories From a CD Investor

Last year, my friend Trish did a bang-up job saving a good portion of her paycheck. She and her partner are trying to buy a home in a few years, but definitely not within the next year or two. Because of this, she wanted to earn some nice interest on her savings without taking on the risk of investing it.

Given her situation and timeline, I encouraged her to put her money into a CD instead of a savings account. I also helped her capitalize on CD rates when they were higher than they are today.

When you get your timing right

In the context of buying stocks, investors are often warned not to try to time the market. But CDs work a bit differently.

It can be very tough to predict when stock values will rise or fall on a broad or company-by-company basis. But CD rates can be a touch more predictable because they tend to rise and fall in line with actions taken by the Federal Reserve.

When the Federal Reserve raises its benchmark interest rate -- the rate banks charge each other for overnight borrowing -- savings account and CD rates tend to rise. When the Fed cuts rates, savings accounts and CDs commonly start to pay less. So it's somewhat possible to try to time the opening of a CD to follow an interest rate hike or get ahead of a rate cut.

In July of 2023, the Fed raised interest rates for the eleventh time since early 2022 as part of its inflation battle. Meanwhile, a few weeks prior, Trish had come to me seeking advice.

I told her that based on her situation, putting money into CDs could be a good idea for her. But I encouraged her to wait until after another Fed meeting or two to open a CD.

The Fed then decided to pause interest rate hikes at its September meeting. And after that, I said "go." I told Trish to open her CD because rates were strong, but were probably only going to go down from that point onward.

And sure enough, she did. The result? She was able to snag a 5.3% APY on a 10-month CD at Capital One. That was a higher rate than what was available prior, and it's a rate that's no longer available on any of Capital One's products. At this point, the highest rate available is 5% on a 1-year CD.

To be clear, 5.3% wasn't necessarily the best APY available at the time across all banks. And it may be possible to find a better APY than 5.3% today on a CD -- especially a shorter-term one.

However, Trish didn't want to go through the hassle of opening an account at a new bank. So she was willing to accept what may have been a slightly lower APY to open a CD in under two minutes, as opposed to having to take the steps to apply elsewhere.

Advice I took myself as well

I'm someone who likes to practice what I preach. So not only did I tell Trish to pounce on that 5.3%, 10-month CD when it became available, but I also opened one that same week myself.

Now I have that rate locked in through next summer. And that's a good thing, because not only are rates already lower at Capital One now, but I expect them to continue to fall this year -- at Capital One and in general.

The Fed is expected to cut rates at some point in 2024. Some big names in the banking industry, like Goldman Sachs, don't anticipate that happening before March. But the Fed is set to meet later this week, and it's possible that a rate cut could happen sooner. So for this reason, I'm confident I got my timing right -- for a friend as well as myself.

Of course, CD timing could be a bit risky in its own right. But if you're really in tune with economic news, you may find that you're able to snag a great interest rate on your money just by virtue of paying attention to what's happening around you.