I Never Thought I'd Open a CD. Here's What Finally Changed My Mind
KEY POINTS
- My high-yield savings rate is a stellar 5.15%, so moving some of those funds to a CD just hasn't seemed worth it to me.
- With talk that the Federal Reserve could lower rates by a full 2 percentage points by the end of next year, I began to worry I'd regret not making a move now.
- I decided to open a 5-year CD -- my rate will be locked in for the entire term, regardless of how rates move over that time.
I'll be frank -- I like to keep my finances simple, and I've never considered certificates of deposit (CDs) to be the right account type for me. With high-yield savings account rates elevated now, and my personal rate being a fantastic 5.15%, I just didn't see the point in CDs.
But after hearing recently that the Federal Reserve expects the federal funds rate to be a full 2 percentage points lower by the end of next year, I began to question things.
What will I do next year if my savings rate has plummeted to the mid-3.00% range, or even lower? Will my chance to lock in the 5.00% rates of today be gone for good? Ultimately, my fear of missing out on locking in a high rate convinced me that opening a long-term CD at today's rates -- before they begin to drop -- would be worth it.
What's happening to rates?
The Federal Reserve raised rates 11 times beginning in 2022 to help fight inflation caused by the COVID-19 pandemic. As a result, rates on deposit accounts are some of the highest we've seen in more than two decades.
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. |
But the rate of inflation has decreased in recent months, so the Fed plans to begin lowering the federal funds rate as a result -- with the first cut expected next month at the Fed's September meeting.
When the federal funds rate begins to drop, rates on deposit accounts are likely to follow. While the federal funds rate will drop gradually over time (rather than all at once), it could be a good idea to lock in as high a rate as possible today, before that first decrease happens.
Taking that advice, I decided to lock in the highest rate I could find on a 5-year CD to guarantee myself today's APYs until August 2029. The rate I scored was a very respectable 4.30% (you'll find it on our 5-year CD list linked above). But what will that mean for my savings over that five-year period?
A couple scenarios
To better show what led to my decision to open a 5-year CD, let's take a look at a couple possible scenarios.
In the first scenario, I have $15,000 in a high-yield savings account earning 5.15% in year one, but dropping gradually each year thereafter -- a reasonable illustration of how rates could fall over the next five years.
| Savings account APY | Interest earned |
|---|---|
| 5.15% year 1 | $791.00 |
| 4.15% year 2 | $667.94 |
| 3.15% year 3 | $526.01 |
| 2.50% year 4 | $429.52 |
| 2.00% year 5 | $351.50 |
As you can see, as my savings account APY gradually drops, so does my interest earned each year. At the end of five years, my savings account balance will be $17,765.97 and I will have earned a total of $2,765.97 in interest on my initial $15,000 deposit.
In the second scenario, I have that same $15,000 in a 5-year CD with a locked-in 4.30% APY for the duration of the term.
| 5-year CD APY | Interest earned |
|---|---|
| 4.30% year 1 | $645.00 |
| 4.30% year 2 | $672.73 |
| 4.30% year 3 | $701.67 |
| 4.30% year 4 | $731.83 |
| 4.30% year 5 | $763.30 |
The trend in this scenario is the opposite. My APY stays the same, but my interest earned each year increases due to compounding interest. At the end of my 5-year CD term, I've earned $3,514.53 in interest for a grand total of $18,514.53. That's about $750 more than I stand to earn in the first scenario.
Things to keep in mind about CDs
For me, running these numbers made the 5-year CD the slam-dunk option. But there are a few things to keep in mind if you're considering going the same route.
- You won't have access to your funds: Money you put in a CD needs to be left alone for the entirety of the CD's term. Put money you may need in the next five years in a high-yield savings or money market account instead where it will be accessible.
- Early withdrawal penalties apply: If it turns out you absolutely must withdraw your money before the CD term ends, you'll be subject to early withdrawal penalties. These vary by bank and CD term, but at the very least you'll lose a portion of your interest earned, which could nullify the whole reason for opening a CD to begin with.
- Rates are not guaranteed: OK, so your CD rate is guaranteed. Whatever rate you lock in now will stick until your CD term is over. But what I mean is that the federal funds rate (and corresponding deposit account rates) is only a projection of what could happen in the future. If the economy tanks or unemployment skyrockets before five years is up, we could very well see the federal funds rate start to inch back up instead of moving downward.
There's no surefire way to tell what rates will look like five years from now, or even by the end of next year. But we can make educated predictions.
It was based on those predictions that I took a gamble and made my own CD decision to cushion my savings from falling rates. Don't find yourself regretting your own savings decisions in the coming years; consider a long-term CD today.
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.
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