Here's the Best Strategy for Buying CDs Now

A friend of mine who's always shied away from buying CDs opened their first one about a month ago. The reason? They realized it was silly not to take advantage of today's amazing CD rates.

CDs can be a risk-free investment when you follow some basic rules:

• Only put in money you know you won't need for the duration of your CD's term
• Only open a CD at a bank that's FDIC-insured
• Limit your deposit to $250,000 (not an especially hard thing, am I right?)

But if you stick to these rules, you have a prime opportunity to earn a 5% return on your money, since that's what many CDs are paying today.

However, I don't think chasing a 5% CD is your best move right now. I'd encourage you to not snag the highest rate for one big reason.

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Why longer-term CDs make sense right now

If you're looking at a CD with a term of 12 months or less, then you may be able to get 5% on your money today. And I can see why you'd be inclined to snag the best CD rate you can get.

However, that's not the best strategy for opening a CD right now. If you ask me, the best strategy is to lock in a CD for as lengthy a term as your bank offers. In many cases, that will be 60 months, though it's possible to find CDs with longer maturity dates if you look around.

Why am I pushing longer-term CDs? It's simple. CD rates are up right now because the Federal Reserve is coming off of a series of interest rate hikes that were supposed to cool inflation. The Fed's strategy has worked to a large degree, so now, the central bank is expected to start cutting rates this year.

Once the Fed begins cutting interest rates, CD rates are likely to fall. And we don't know to what extent they'll fall over the next few years.

The way I see it, you could snag a 5% APY on a 12-month CD today. A 60-month CD might only give you a 4% APY. But that 4% is then guaranteed for the next five years.

Perhaps 12-month CDs will only be paying 3.5% at this time next year, and 2.25% at this time the following year. So all told, if you can afford to part with some of your money for five years, you might come out far ahead financially with a 60-month CD despite the lower interest rate.

Shop around for the best rate

Of course, the one reason not to open a 60-month CD is if you're not sure what your financial goals entail over the next five years, and you're not sure you can afford to tie up money in a longer-term CD because of that.

But let's say you're about five years from retirement and want some of your money in a safer asset than stocks. That would be an optimal situation for opening a 60-month CD.

Similarly, maybe you're not close to retirement age, but you're in the home stretch of saving for your child's college education and you don't want to take on the risk of investing in stocks. In that case, a 60-month CD makes sense if it will come due in time to start paying those tuition bills.

No matter what CD term you choose to pursue, make a point to do some research so you can snag the best rate. But don't just just fixate on the best rate available today. You may come out a serious winner if you give up the best rate in favor of a rate that's almost as good and has a lot more staying power.