Here's Why I'm Opening Long-Term CDs in the Next Few Months

To battle rampant inflation, the Federal Reserve was forced to implement a series of interest rate hikes beginning in 2022. That, in turn, drove the cost of borrowing up, putting a huge burden on consumers in need of loans as well as those with credit card balances.

But the Fed's rate hikes haven't been all bad news for consumers. Following those hikes, savings account and CD rates rose substantially. Nowadays, you can lock in a pretty attractive APY on a certificate of deposit (CD).

In the coming months, I hope to open a CD or two. But my intent is to stick to terms of 48 months or longer, even though shorter-term CDs are generally paying more right now. Here's why.

I'm saving for a specific goal that isn't so far away

First, let's talk about why I'm choosing to put money into CDs for what I'll call a four- to five-year period rather than, say, the stock market. Generally speaking, when you're working on far-off goals, it's a good idea to invest your money rather than stick to CDs.

Over the past 50 years, the stock market has averaged an annual 10% return. By contrast, with a long-term CD now (which I'll define as a term of 24 months or longer), you may only be looking at an APY in the 4% range. And when you're saving for a milestone that's decades away, it's better to get a 10% return on your money than less than half that amount.

But the milestone I'm saving for -- college -- is getting to be frighteningly close. Although my oldest child is still in middle school, college isn't so far off at this point. My general rule when it comes to investing in stocks is that I stay out of the market when the objective I'm saving for isn't more than five years away. With a shorter investment window, you have less time to ride out market downturns.

Technically, I'm just beyond that five-year window. But because I have other investments for college, I want to put some money away for my kids' education in cash to offset some of the risk I'm taking in my portfolio. And since the milestone I'm saving for is somewhat close by, I'm willing to forgo a higher return for what I consider to be a risk-free return in the 4% range.

To be clear, with CDs, deposits of up to $250,000 are protected if your bank is FDIC insured. And that limit rises to $500,000 with a joint account.

I want to lock in a longer-term CD before rates start to fall

Now that I've explained why I'm looking at CDs over stocks or other investments, let me talk about why I'm looking at longer-term CDs in the coming months versus shorter-term CDs. These days, you'll probably get a higher APY on a 12-month CD than on a 48- or 60-month CD, which are some of the terms I'm interested in.

The reason for this is that the Fed is expected to start cutting rates later in 2024. Once that happens, CD rates are likely to fall. And as those rate cuts pick up in 2025 and 2026, which could easily occur, CDs may start to become a less attractive option altogether.

What I want to do is put money into longer-term CDs while rates are still strong like they are today. That way, I'll have some cash on hand available for college tuition so that if, at that point, my investments in my oldest child's college account aren't doing so well, I'll have options.

Because the CD rates we're seeing today may not be available again for a long time beyond 2024, you, too, may want to lock in a longer-term CD if that aligns with a specific strategy or goal of yours. If you're saving for a milestone that's about five years away like I am, you may decide that you don't want to take on the risk of the stock market.

But in that case, lock in a 48- or 60-month CD now, or in the next few months, while you can still get 4% or more on your balance. A longer-term CD like that may not appeal to you a year from now if you're looking at just 2% on your money.