3 Reasons It's Never a Bad Time to Open a CD

Thanks to long-awaited action by the Federal Reserve, we're now in a lower interest rate environment. On Sept. 18, 2024, the Federal Reserve cut the federal funds rate (its benchmark interest rate) by half a percentage point. This big cut has big implications for Americans' finances.

If you have money in the bank, you're likely to see a lower interest rate on your accounts starting soon (if you haven't seen them fall already). And this extends to new certificates of deposit (CDs), which had been offering attractive rates of around 5% for shorter terms. Does this mean it's now a bad time to open a CD? Nope -- and here's why.

1. CDs offer a guaranteed return with fixed rates

This is really the biggest perk of a CD over, say, a savings account or a money market account. That high APY you see listed for a high-yield savings account? Don't get too attached -- it can fall (and rise, which is less likely in the current economy) at any time. When banks lower rates, it means you earn less interest on your money.

But when you open a CD, you're guaranteed to earn that same rate on your cash for the entire CD term -- be it three months, a year, or five years. That makes CDs a great choice for money you know you'll need at a certain point in the relatively near future (say, within five years).

Our Picks for the Best High-Yield Savings Accounts of 2024

Product	APY	Min. to Earn
American Express® High Yield Savings Member FDIC. APY 3.80% Rate info 3.80% annual percentage yield as of December 28, 2024. Terms apply. Min. to earn $0 Open Account for American Express® High Yield Savings On American Express's Secure Website. Member FDIC.	3.80% Rate info 3.80% annual percentage yield as of December 28, 2024. Terms apply.	$0	Open Account for American Express® High Yield Savings On American Express's Secure Website.
Capital One 360 Performance Savings Member FDIC. APY 3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.	$0	Open Account for Capital One 360 Performance Savings On Capital One's Secure Website.
Western Alliance Bank High-Yield Savings Premier Member FDIC. APY 4.46% Rate info The annual percentage yield (APY) is accurate as of November 7, 2024 and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website. Member FDIC.	4.46% Rate info The annual percentage yield (APY) is accurate as of November 7, 2024 and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	$500 to open, $0.01 for max APY	Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website.

Buying a house in two years and need a safe place to keep $10,000 for a down payment? A 2-year CD is a solid option, and you'll know how much you stand to earn when you open one. And if you open one with an online bank, you're likely to see a generous rate even in a lower interest rate environment. That's because online banks have fewer overhead costs than traditional banks and offer higher rates to customers.

2. CDs are (nearly) risk-free

I say "nearly," because there are a few scenarios in which you could lose money in a CD. The first is choosing to open one with a bank that isn't FDIC-insured. This is a terrible idea!

All the CDs we recommend here at Motley Fool Money come with FDIC insurance (or in the case of credit unions, NCUA insurance, which serves the same purpose). That means up to $250,000 of your cash is covered per depositor, per insured bank, per ownership category. So if the bank holding your CD fails, your money is safe.

The other way you can lose money in a CD is if you need to withdraw your money early. In that case, you'll need to pay an early withdrawal penalty, the amount of which can vary based on your bank. A typical penalty is three months' worth of interest on CDs with terms of up to 12 months.

This also means that if you haven't had the CD open long, you could end up losing money from your principal if you haven't yet earned enough interest to cover the penalty. So just be sure you can commit to the entire term before opening a CD.

3. CDs offer an incentive to leave your savings alone

Those early withdrawal penalties can be a great incentive not to withdraw your money early and spend it on something other than what you originally planned to use the money for.

If you want to spend that $10,000 from earlier on a home purchase in two years, but six months from now, you find a great last-minute deal on a cruise vacation, you might not feel too bad about taking $2,500 out of a regular savings account. But if you withdraw from your CD, you'll owe that penalty. CDs offer more reason to leave your savings alone -- because if you don't, it'll hit you right in the wallet.

Is a CD right for you?

Just because CDs offer useful perks and features doesn't necessarily make them right for every saver or situation. Here's how to know a CD is right for you:

• The cash you're putting in one has a set timeline (don't put your emergency fund in a CD; you might need that money at any time).
• That timeline is shorter than five years (for longer than five years, you likely have enough time to mitigate risk of loss by investing in the stock market, where you're likely to earn a much better return).
• You can meet the minimum deposit requirement of a CD (some banks don't have this, but others require as much as $2,500 to open an account).

Yes, rates on CDs are going down. But that doesn't mean now isn't still a good time to open one. Consider your needs and financial situation to decide whether a CD is right for you.