3 Reasons to Open a 12-Month CD This January

If you have money you're looking to put in the bank for unplanned expenses, then it's best to stick with a regular savings account. That's pretty much always the most optimal home for your emergency fund. But if you have savings beyond that, you may want to consider opening a certificate of deposit (CD).

CD rates tend to be higher than savings account rates in general because with a CD, you're making a commitment to keep your money in the bank. And right now, CD rates are pretty strong across the board. However, you may want to specifically focus on opening a 12-month CD this month for these key reasons.

1. The 12-month CD rate is very competitive right now

At Capital One, you'll get a 5.25% APY on a 1-year CD right now. With a 5-year CD, you're looking at 4.10%.

Similarly, at Barclays, you can earn a 5.30% APY on a 1-year CD. With a 5-year CD, you're looking at 4.15%.

Now, the upside of locking in a 60-month CD is that your rate is guaranteed for five full years. But if your goal is to score the highest rate possible right now, then a 12-month term may be your best bet today.

Of course, each bank ultimately sets its own rates, so you'll need to check to see what yours is offering. But chances are, you'll find plenty of banks paying more generously for a 1-year CD than a longer-term one.

2. Rates have the potential to fall in the near term

There's a reason banks are paying a higher rate of interest on shorter-term CDs than long-term CDs. The Federal Reserve is expected to begin cutting interest rates this year as inflation hopefully continues to cool down. Once that happens, interest rates for CDs and savings accounts could fall across the board. So it's a good idea to lock in a strong interest rate while you can.

It may be that the difference between what your savings account and what a 1-year CD is paying today isn't so substantial, depending on your bank. And if there's not a huge difference, you may be inclined to stick to a savings account since that lets you access your cash at any time.

But remember, savings account rates are never set in stone. With a 12-month CD, your rate is guaranteed for a year.

3. You're not making an overly long commitment

The downside of putting money into a CD is that you're required to leave it alone for a specified period of time. Cashing out a CD before it matures could result in penalties, the exact amount of which will depend on your bank.

The good thing about a 12-month CD is that you're not committing to an unreasonably long term. It may be difficult to predict what expenses will come your way over the next five years, so a 60-month CD could be risky. But chances are, you have a pretty good sense of what the next year has in store.

Of course, either way, you do not want to put your emergency fund into a 12-month CD. But if you're talking about separate funds, and you don't have specific near-term expenses on your radar, then opening a 1-year CD could be smart.

When it comes to finding a home for your money, you clearly have plenty of options. But for these reasons, at least consider a 12-month CD at a time when you're likely to score a really sweet interest rate on one.