Should I Open a CD Now, or Hold Out for a Better Rate?

You could go either way, so here's how to figure out what's right.

If you have money set aside for emergencies, it's generally best to keep that cash in a savings account. That way, you have access to it at all times.

But you may have money available beyond what you need for your emergency fund. If you don't feel comfortable investing it in a brokerage account, you may be inclined to put it into a certificate of deposit, or CD, instead.

CDs tend to pay more interest than savings accounts do, but in exchange for those higher rates, you need to commit to tying up your money for a preset period of time. That could be six months, a year, two years, or longer. If you cash out a CD early, you'll generally lose several months' worth of interest as a penalty, so that's a situation best avoided.

Meanwhile, CD rates happen to be competitive right now. Many banks are paying upwards of 4% for a one-year CD. But CD rates could also keep rising this year. And so the question is: Should you open a CD now, or hold off and wait for a better rate to become available?

The pros and cons of waiting

Let's say you sit tight and keep your money in a regular savings account now, and then CD rates rise to, say, the 5% range for a one-year CD. In that case, waiting a few months could work to your benefit. The problem, though, is that we don't know when and how CD rates will rise.

There's reason to believe CD rates will increase modestly this year on the heels of rate hikes on the part of the Federal Reserve. The Fed raised its benchmark interest rate at the start of February by 0.25%. That's a modest hike, but a hike nonetheless.

Since the Fed isn't done battling inflation, we could see several more interest rate hikes this year alone. And those could drive CD rates up. The problem with waiting to open a CD, however, is missing out on a chance to start earning interest on your money now.

Let's say you think interest rates for CDs will rise by mid-year. That's all fine and good. But if you wait until then to open a CD, you'll miss out on several months' worth of interest.

A good compromise

If you want to start earning interest on your money but don't want to lose out on higher CD rates, a good bet may be to open a shorter-term CD now, like a six-month CD. That way, you get to put your cash to work but aren't committed to too long a time frame.

Another option? Put some of your money into a one-year CD, and then wait a few months to tie up the rest. If you see rates increase for CDs, you can put the rest of your cash into a second CD a few months later and enjoy that higher return.

In fact, laddering your money is a good bet when it comes to CDs. This means dividing up your cash and putting it into different CDs that mature at different times. It's a good strategy for not only capitalizing on CD rate increases, but also, getting access to your money at different intervals so you have more flexibility.