My Savings Account Has a 5.25% APY. Here's Why I'm Closing It

In case you haven't noticed, many of the best savings accounts have annual percentage yields APYs between 5% and 5.25%, with quite a few going even higher than that. Considering that rates were extremely low just two years ago, these APYs are an excellent way to earn some passive income for any money that you're saving.

Of course, I wouldn't say a savings account is the best financial product on the market today. In fact, even though my savings account has 5.25% APY, I'm closing it before the end of the month. Here's why.

CDs offer a better opportunity for my savings

If there's one thing that I like about CDs right now, it's the ability to lock in an APY for the length of my CD term. This guarantees that I'll earn a certain amount of interest, even if CD and savings rates drop significantly.

Don't miss that. Savings accounts have variable interest rates, which means your bank has the right to change your savings rate on any given day without your prior consent. You might be earning 5.25% APY on a savings account right now, but in a few months that rate could be significantly less, especially if certain market conditions transpire.

Those "market conditions" will likely involve a lower annual inflation rate, followed by the Federal Reserve cutting its federal funds rate to stimulate economic growth. Inflation has been steadily declining ever since it peaked at 9.1% in June 2022. In January 2024, for instance, the annual inflation rate was 3.1%, which is still not in the Fed's targeted goal of 2% but getting steadily closer.

As it gets closer to that targeted 2%, the Federal Reserve will likely cut its rate, which will directly impact rates on savings accounts and CDs. Both will likely sink lower and lower, especially if banks become more confident that said rate cuts are coming.

This is why CDs are looking attractive right now. Again, CDs have the ability to freeze APYs for longer periods. By locking into a high CD rate now, I can extend today's great rates farther into the future. It certainly helps that I have money I'm not going to use for the next year. But even if I didn't, I would still look at 3- to 6-month CDs, both of which have great rates and short terms.

Which CD am I considering?

In the past, I've used Raisin to snag some great short-term CD deals. But recently the Bread Financial 1-year CD has caught my eye. Not only does this CD have a competitive APY for its first year (5.35% as of Feb. 24, 2024), but it also gives you the option to auto-renew for a second year with a 5.40% APY. In essence, this is like getting a 2-year CD with a 5.38% APY, which would make it the best CD for that term on the market today.

All in all, if you have savings that you're not going to use in the near term, a CD might be the best option for your money. Take a look at some of the best CDs on the market and lock in today's great rates before they start to change.