How to Make the Most Out of Current CD Interest Rates

A little over a month ago, 5.00% APY certificates of deposit (CDs) were getting scarcer, but they were still around. But after the Federal Reserve slashed the federal funds rate by half a percentage point on Sept. 18, those rates quickly disappeared. Now, you're lucky if you can find rates over 4.50% -- and even those are only available for select CD terms.

It's understandable if you're disappointed that you missed the top rates. But you can still lock in above-average CD APYs before the next anticipated Fed rate cut on Nov. 7. You just need the right strategy.

When do you expect to spend the money?

The first question you must ask yourself before you even look at CDs is when you expect to spend your money. CDs have penalties for early withdrawals, so you don't want to choose a term that's too long. For example, if you expect to spend your money in six months, then a 12-month CD probably isn't a good idea because you'll face penalties for taking your money out early.

It's also important to note if you plan to use the money more than five years into the future. In that case, a CD might not be your best option. Even at their peak, CDs didn't offer the same returns as you could get by investing in the stock market.

There's a risk of loss associated with this, of course. But most investment losses are short-term. If you don't need your money for a few years, it could be worth a shot. 

If you're new to investing, a Fidelity brokerage account could be a good choice for you. It's user-friendly and there are $0 commission fees on U.S. stock and ETF trades. Give it a closer look if you want to try maximizing your wealth.

How do you choose the right CD?

Once you have an idea of how long you're comfortable locking your money away, the next thing to do is choose the right CD for you. There are two key factors to focus on here: minimum deposit and interest rate.

Some CDs have minimum deposits as high as $2,500, though most don't set the bar this high. Some require just $500 or they may not have a minimum deposit requirement at all. Think about how much you plan to set aside and rule out any banks with deposit requirements higher than this.

Then, compare interest rates to see which bank offers the best APY for the longest CD term you're comfortable with. Options vary by bank, but most offer at least the following terms: 6-month, 12-month, 18-month, 2-year, 3-year, 4-year, and 5-year.

Compare offers from some of the top CD providers to get a sense for what's available. Once you've found one you like, review the CD terms, including the early withdrawal penalty, to make sure you're comfortable with them. Then, act quickly to open an account before Nov. 7.

What about CD ladders?

CD laddering is a popular strategy where you divide the savings you'd like to invest between several CDs of different terms. When one CD term expires, you can spend that money, transfer it to a savings account, or reinvest it in another long-term CD. This gives you access to a portion of your savings more often while allowing you to capitalize on the higher interest rates long-term CDs generally offer.

Building a CD ladder is a possibility right now if you're more comfortable with this, but there are two things to keep in mind. First, CD minimum deposit requirements apply to each CD, so you might need to deposit a larger sum to do this, depending on your bank's requirements.

Second, since interest rates are going to fall, when you renew your CDs at the end of their terms, you'll almost certainly have to lock in a lower rate than what's available today. If you'd like to guarantee a higher rate on all your savings, you may prefer to keep it all in one CD that you open while rates are still high.

Either approach is fine, but be sure to review your options and open your CDs within the next couple of weeks. If you wait until after the next rate cut, you’ll have to settle for lower APYs.