CD Rates Could Fall This Year -- But Here Are 3 Reasons to Wait on Opening One

There's a reason I took a bunch of money out of a regular savings account earlier this month and used it to open a CD. CD rates are really strong right now, with some banks paying upward of 5%.

But the Federal Reserve is expected to start cutting interest rates at some point this year. The reason is a good one: cooling inflation. And that should, thankfully, bring the cost of borrowing down. But it's also going to mean lower CD rates than what we're seeing today, which is why I chose to open a CD before the Fed's first rate cut.

You may be eager to lock in a CD at a great rate, too. But you ought to hold off if any of these factors apply to you.

1. You're still working on your emergency fund

It's important to have money on hand at all times for unplanned bills. And the general consensus is that your emergency fund should have enough money to cover three to six months of essential bills. That way, if you were to lose your job, you'd have money for bill-paying purposes, thereby avoiding costly debt.

Our Picks for the Best High-Yield Savings Accounts of 2024

SoFi Checking and Savings APY up to 4.60% Rate info You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet. Min. to earn $0 Open Account for SoFi Checking and Savings Member FDIC.	APY up to 4.60% Rate info You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.	Min. to earn $0
Synchrony Bank High Yield Savings APY 4.75% Rate info Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC Min. to earn $0 Open Account for Synchrony Bank High Yield Savings Member FDIC.	APY 4.75% Rate info Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC	Min. to earn $0
Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 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 Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0

But if you're not done building your emergency fund, then you shouldn't open a CD. You should only open a CD with money you have beyond what you've saved for emergencies.

The reason? Cashing out a CD prior to its maturity date can result in a costly penalty, the exact amount of which will depend on the bank you use and the length of your CD. At Capital One, for example, if you cash out a 12-month CD early (even a few weeks before it matures), you're looking at being penalized three months of interest.

So let's say you put $5,000 into a 12-month CD paying 5%. If you end up withdrawing that money for an unplanned expense and have to pay 3 months of interest, you'll face a penalty equal to $62.50. That may not be a life-changing sum of money, but why give it up when you could've kept your emergency fund in a regular savings account and avoided a penalty?

2. You're very new to paying your own bills

Maybe you're a recent college graduate with a brand-new job and apartment. You might think you have all of your expenses under control. But what if your utility bills start coming in higher than expected? Or what if your car insurance company decides to raise your rates because you've moved to a new ZIP code?

If you're pretty new to paying bills, you may want to keep extra cash on hand for surprises. It could pay to hold off on tying up any of that cash in a CD, despite the temptation to snag a really great rate.

3. You have a near-term expense and are still figuring out the cost

Maybe you've been saving for new flooring in your home and are getting price quotes. Or maybe you're planning a summer vacation but haven't nailed down all of the details. You don't want to mess with goals you've been saving up for simply to earn a little more interest on your money. That's not really fair to you. So if you have a near-term expense whose cost you're still trying to calculate, hold off on putting money into a CD.

Remember, though a CD might give you the benefit of a higher interest rate on your money -- and a guaranteed interest rate at that -- it's not like you're looking at earning nothing in a high-yield savings account. If you can earn 4.3% on your savings while maintaining the flexibility to access your money whenever you want, then why risk a penalty to earn 5%? On a $5,000 deposit, you're talking about a difference of less than $3 per month.

And sure, that gap might widen if savings account rates start to fall. But still, if you've worked hard to save your money, you deserve to be able to use it without stress. So don't open a CD if you can relate to any of the above situations.