The Top 3 Reasons to Open a 5-Year CD in 2024

Any time you have savings that aren't earmarked for some particular goal -- emergency fund, retirement, buying a house, travel -- you have to figure out where you're going to store it. One option is a long-term certificate of deposit (CD), like one with a five-year term. CDs typically have higher interest rates than a high-yield savings account (another option for long-term savings), and they can guarantee those rates for the length of their terms.

Of course, locking your money in for five years isn't a decision to make rashly. Many 5-year CDs come with early withdrawal penalties, which will slap you with a hefty fee for trying to withdraw cash before your CD matures. But if you have a long time horizon, here are some reasons to lock into a 5-year term this year.

1. Get a guaranteed rate of return

Most CDs can give you something that most bank accounts can't promise: a fixed interest rate. When you lock into your CD term, you'll know in advance how much interest you'll earn. Unlike with savings and money market accounts, your CD rate won't fluctuate, which can be a good thing if interest rates drop across the board later this year.

This does come with a caveat: If interest rates were to rise, you might be stuck earning at a lower rate than with other CD products. But if you think interest rates will drop in the near future, a 5-year CD would then freeze rates before they do, effectively extending this period of great interest earnings.

2. Restrict access to your savings

If you're afraid you might spend the savings you've built up, a CD could help you control that temptation. Most CD providers charge hefty penalties for any early non-emergency withdrawals. This creates some friction between you and your savings, making it more difficult to spend frivolously.

Course, you could also get a no-penalty CD. These CDs allow you to liquidate your account before your term ends without levying a penalty. But these CDs are usually only available in shorter terms (like six months), and you'll have to close your CD account to access your money, as they don't allow partial withdrawals. They could be great for short-term savings, but if you have a longer time horizon, you'll likely have to accept restricted access to your savings.

3. Earn high interest for longer periods

As discussed above, CDs can freeze interest rates, which makes them especially useful in 2024. As inflation continues to moderate, the Federal Reserve will likely start cutting rates later this year. While no one is certain when the Fed will start cutting rates (not even the Fed seems to know), there's a good chance we could see a few rate cuts starting this summer.

Even if it doesn't happen in 2024, it's likely it will happen with increased frequency in the years to follow, assuming inflation continues to ease. That would bring in a low tide for savings rates on all accounts, including CDs. By locking into a 5-year CD term, you could end up earning at a high APY at a time when rates are much lower.

Right now, the best 5-year CDs have super competitive rates compared with the same CD term in previous years. They're not, however, the highest-paying CDs on the market. If you're looking to earn the most interest on your savings for the short-term, you might be better off with a shorter term, like a 1-year CD.

But I wouldn't dismiss 5-year CDs because they have lower rates. In fact, you could end up earning more interest just by locking your money up for a longer period. For example, Quontic has a 5 Year CD currently at a 4.30% APY. With $10,000 invested in this CD, you'd earn $2,343 after five years, or an average of $468 per year. A 1 Year CD from the same bank has a 4.50% APY, which would leave you with $530 for the same deposit. But when your term ends next year, there's no guarantee you'll find another CD with a comparable rate, which might even leave you earnings less than 4.30%.

All in all, I would consider a 5-year CD if you have a long time horizon. Though you might not get the highest APY today, your lifetime CD earnings might be greater than what any chain of short-term CDs could offer. If you're interested, take a look at some of the best CDs and see what CD rates banks are offering.