APY FOMO: Open a Long-Term CD Today Before Savings Rates Begin to Plummet
KEY POINTS
- By the end of next year, your savings account APY could have dropped by more than 2 percentage points based on current federal funds rate predictions.
- CDs allow you to lock in your rate for the entire length of the selected term.
- Don't stash your funds in a CD if you'll need the money before the CD term ends, or if your investing timeline goes beyond five years or so.
If you've been sitting back, relaxing, and watching the interest pile up in your high-yield savings account over the past couple of years, then I can relate -- I've been in that same boat. The current federal funds rate of 5.33% has been good to deposit account holders, with the best high-yield savings accounts offering APYs that are generally in line with that number (the top APY on our list is currently 5.31%, and that's no coincidence).
But you can't open up the paper or turn on the news without hearing that the Fed plans to begin lowering the federal funds rate in September, with continued decreases likely for at least the next couple of years. The Fed predicts that by the beginning of 2026, rates could be as low as 3.1% -- more than 2 full percentage points below the current.
What does that mean for our savings account APYs? Unfortunately it likely means they'll look pretty similar. And it's for this reason that today is an excellent time to lock in one of the best CD rates on a longer-term CD.
Why does term length matter?
With CDs, term length could mark the difference between choosing to lock up your money in a CD vs. leaving it in savings or investing some other way (like a brokerage account).
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. |
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. |
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. |
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. |
In short, you're in it for the guarantee. If you're worried that Fed predictions will come to fruition and savings rates will plummet by 2 percentage points or more in the next two years (and possibly even further after that), then the peace of mind that locking in a high CD rate today provides could be just the thing to head off any regrets down the road.
If you lock in a 4.30% APY on a 5-year CD now, for example, then you can rest reasonably assured that your APY will outpace that of the federal funds rate (and thus, savings accounts) over that five-year stretch. And when savings rates begin their gradual decline, you won't have to wallow in the regret from not having made a move sooner.
How much could you earn?
The amount you earn in your long-term CD will depend on how much you have to invest and the exact APY you lock in, but let's look at a few basic scenarios using our example of a 5-year CD earning 4.30% from above:
| $5,000 Deposit | $10,000 Deposit | $20,000 Deposit | |
|---|---|---|---|
| Interest Earned After 5 Years | $1,171.51 | $2,343.02 | $4,686.05 |
| Total After Interest | $6,171.51 | $12,343.02 | $24,686.05 |
Even our lowest deposit guarantees that your money will have grown by more than $1,000 over five years, with absolutely no requirements on your part other than opening the account and leaving that money alone. The more cash you have to deposit, the more growth you'll see by the end of your CD's term.
Only invest in a long-term CD if…
Make sure the following are true before you lock up your funds in a CD.
- You have separate emergency savings that are easily accessible and will allow you to make it through your CD's term without having to withdraw the money and pay an early withdrawal penalty.
- Your investing timeline has a medium term of around three to five years. Short-term cash should go in savings, while cash you won't need for the long term should go in a brokerage account where it can compound and grow to its maximum ability. Historically, the S&P 500 has an average return of about 10% -- even the most premium CD rates can't touch this number.
- You want to earn the most possible interest on your funds over a longer stretch. Admit it, it's going to feel excellent come 2026, 2027, and beyond when your 5-year CD is still earning upward of 4.00% APY. Meanwhile, your neighbor's savings account APY is languishing around 2.50% or 3.00%, or even lower.
FOMO (fear of missing out) is legit, and in today's high, but soon-to-drop rate environment, there's a very real possibility that savers who are content with keeping their money in a high-yield savings account may experience it.
Open a CD and lock in a high APY today, while rates are hot. Then, over the next several years, while everyone else is mourning lower rates, you can instead relax and be grateful for the foresight you had to open your long-term CD.
Our Research Expert
Jamie Matthews is an alumnus of Ohio State University and still calls Columbus, Ohio home. She is a finance editor and occasional writer with more than nine years of experience. When she isn't poring over other people's grammar and punctuation, she enjoys baking, reading, and being a proud dog mom.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.