Sure, interest rates are slipping on the heels of the Federal Reserve’s 0.50% cut to its benchmark interest rate a few weeks ago, but I can still give you two good reasons to consider buying CDs before the rates drop more:
- Once you’ve locked it in, a CD rate can’t drop.
- Early withdrawal penalties can be a pretty great guardrail.
I’m not suggesting that everyone drop their money into a CD. If you don’t have an emergency fund in a high-yield savings account to help you through a financial crisis, building that should be your priority. However, if you’re looking for an excellent way to grow money you’re unlikely to need right away, a CD can be a superb option.
What’s more, you can choose how long you want to hold that CD. Where else can you find options stretching three months to 10 years? If you like to settle in the middle, a 5-year CD is almost always available.
Let’s dive deeper into the two significant reasons CDs are worth consideration.
Our Picks for the Best High-Yield Savings Accounts of 2024
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American Express® High Yield Savings APY 4.10%
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APY 4.10%
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Min. to earn $0 |
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Capital One 360 Performance Savings 
APY 4.10%
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APY 4.10%
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Min. to earn $0 |
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CIT Platinum Savings 
APY 4.70% APY for balances of $5,000 or more
Min. to earn $100 to open account, $5,000 for max APY
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APY 4.70% APY for balances of $5,000 or more
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Min. to earn $100 to open account, $5,000 for max APY |
1. Rates are guaranteed
Once you’ve purchased a CD, the annual percentage yield (APY) is guaranteed to remain the same throughout the term of that CD. For example, let’s say you snag a CD with an APY of 4.90%, and you’re concerned about how quickly the rate on your high-yield savings account or money market account is falling.
You hear the Federal Reserve will continue to drop rates over the next year, and you wonder if there’s a safe haven for money you’ll need down the road. A CD can serve this purpose. Will you earn as much as you might earn investing in the S&P 500? Probably not, but one thing a CD can give you that the stock market can’t is a guaranteed rate of return.
If searching for the right CD feels daunting, click here to find a curated list of some of the best rates we’ve found.
Let’s say you have $1,000 you don’t expect to need soon. Maybe you’re starting a fund for a small child you expect will need braces on her teeth one day, or you’re saving up for a long-term goal, like buying a classic car. In either case, you don’t want to risk a penny of your principal, but you like the idea of earning interest.
Fortunately, you find a CD that requires a low minimum deposit but pays an APY of 4.00%. You decide to go with a 48-month term.
If, during that time, interest rates plummet, your rate remains steady at 4.00%. Until the day the CD matures, you know precisely how much you can expect to earn.
2. Penalties are not necessarily a bad thing
How often have you started to save for something, only to withdraw the money for another reason? That’s a fairly common occurrence in most of our lives.
As you learn more about CDs, you may worry about the phrase “early withdrawal penalty.” No one likes being penalized, even if the penalty results in losing some of the interest you would have otherwise earned.
However, there’s something to be said for knowing that cashing out a CD before it matures could cost you. This is especially true if the penalty acts as a guardrail, helping train you to leave savings and investments alone until they have time to grow.
Each time you allow a CD to mature, you flex your financial muscles. More importantly, you build a more secure financial future — and with all the turmoil and uncertainty within the U.S. economy, that’s what it’s all about.
