The Federal Reserve spent much of 2022 and 2023 raising interest rates in an attempt to cool inflation. And thankfully, it worked. Inflation is less of a nuisance now than it was a couple of years back, which means consumers today aren’t looking at quite the same costs at the supermarket or gas pump.
However, the Fed’s interest rate hikes unfortunately drove the cost of borrowing way up. So for the past year or so, many consumers with debt have been burdened with higher costs. But the Fed’s rate hikes have benefitted people with money in the bank. These days, savings accounts are paying generously.
Certificates of deposit (CDs) are also paying out well. Since the Fed is expected to cut interest rates at some point in 2024, now’s a good time to lock in a CD. Once rate cuts come down the pike, CD rates may not be as attractive.
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I personally want to open a CD in March. But I won’t be chasing the highest rate possible for one big reason.
I’m thinking long term
Because banks are well aware that interest rate cuts are likely this year, they’re being more conservative with their long-term CD rates. As such, you’re likely to get a higher interest rate on, say, a 6- or 12-month CD in March than on a 48- or 60-month CD.
Capital One, for example, has a 4.35% APY on a 6-month CD and a 5.00% APY for a 12-month CD. For a 48-month CD, you’re looking at 4.05%. For a 60-month CD, the APY is 4.00%. So if I were to open a 60-month CD this month at Capital One, I wouldn’t end up with the highest APY available there. But that’s also okay.
See, I specifically want to open a longer-term CD because I’m saving for a milestone — college — that isn’t so far away. I also have money in the stock market for college purposes, but because those tuition bills aren’t so far off, I want to keep some of my college savings in a safer asset, like cash, for about the next five years or so.
If I open a 12-month CD this month, I might score a higher APY. But then what happens in a year from now, when rates are likely to be lower across the board? At that point, I may not be able to renew that CD to another 12-month term for anywhere close to 5%, or even 4%. That’s why I specifically want to lock in a longer-term CD in the coming weeks. And I don’t care if I don’t end up with the best interest rate because of that.
It’s a matter of your own needs and goals
If you’re sitting on some extra cash, you may be inclined to put it into a CD while rates are still pretty attractive. But before you make a point to try to lock in the highest rate possible, think about your personal needs and goals. Like me, you may find that it makes sense to forgo a bit more interest in the near term to earn more interest on your money in the long term.
