Should You Open a 12-Month CD in 2024?

It's important to maintain a solid emergency fund in case an unplanned expense lands in your lap. And the best place to keep your emergency fund is a savings account. That way, you can access your money whenever you need to.

With a certificate of deposit, on the other hand, you're making a commitment. Specifically, you're agreeing to keep your money in the bank for the duration of your CD's term. That could be six months, 12 months, or longer. 

And if you withdraw your money early, you could end up on the hook for a costly penalty, depending on your bank's policy. At Capital One, for example, you'll lose out on three months of interest if you cash out a CD of 12 months or fewer before it comes due.

You may be interested in opening a 12-month CD in 2024. But before you do, consider the benefits and drawbacks.

The upside of opening a 12-month CD

Banks tend to offer higher interest rates for CDs than savings accounts because you forgo easy access to your cash. If you open a 12-month CD in 2024, you should expect to earn more interest on your money than with a regular savings account. Also, that interest rate is set in stone, whereas with a savings account, your interest rate could change over time.

That's something to keep in mind, given that many financial experts are talking about rate cuts from the Federal Reserve in the new year. If the Fed cuts interest rates, it could result in a world of relief for borrowers who are currently facing sky-high costs for signing personal loans or carrying credit card balances. But rate cuts could also mean lower interest rates for savers. 

If you keep your money in a regular savings account, you may find that the interest rate you earn in January is not the same rate you end up earning toward the end of 2024. With a 12-month CD, the rate you start with is the rate you'll enjoy for the entire following year.

Plus, as of this writing, you can snag a pretty sweet APY on a 12-month CD. You can get a Capital One 360 CD with a term of 12 months and an APY of 4.80%. That's the highest-paying CD term you'll find there.

And if you're wondering why a bank would pay more on a 12-month CD than, say, a 60-month CD, the reason boils down to the point above. With rate cuts on the horizon, banks need to be somewhat conservative with the long-term CD rates they offer. 

The downside of opening a 12-month CD

It could work to your benefit to open a 12-month CD in 2024. But remember, you'll be giving up access to your money (or otherwise risking a penalty) for an entire year. And a lot can change in a year.

You might assume that you won't have any large expenses to pay for in 2024, and that you're therefore safe to tie up your money for the full year. But what if circumstances change? 

What if you meet someone at the start of the year and you decide to move in together after 10 months? You might need to raid your cash reserves to put down a security deposit on a new place. If your money is tied up in a 12-month CD, you might have a problem.

Or, you might get a new job that requires you to commute and buy a car. Once again, you're in a position where your money is stuck in the bank for a full year.

This isn't to say that a 12-month CD is a bad idea. But make sure you're really comfortable tying up that money for that long of a period. If you're not sure whether it's the right move, you may want to choose a CD with a shorter term, even if it means accepting a lower interest rate.