Why 2024 Is the Year of the CD -- and Why You Might Want to Open One

Certificates of deposit (CDs) are showing strong levels of "interest" (ha!) among bank customers in 2024. If you've been thinking about opening a CD but not sure if you should do it, now is a good time to crunch some numbers and weigh your options.

Opening a CD could be a good move this year, but only if you're aware of the possible risks and drawbacks. CDs are not always the best place for people to keep their savings. But if the Fed goes ahead with interest rate cuts in 2024, opening a CD before interest rates fall could be a smart financial move.

Let's look at the biggest reason why you might want to open a CD in 2024 -- and one big reason to put your money in another place.

Why open a CD in 2024: Lock down a high APY

Today, the best CDs are offering rates of 5.00% APY and higher. These are some of the highest rates we've seen on CDs for several years. And interest rates might be about to go down.

That's because, as of March 7, 2024, Federal Reserve Chair Jerome Powell said that the Fed is "not far" from being ready to cut interest rates, as long as inflation continues to move in the right direction. No one knows for sure when the Fed might cut interest rates. But if the Fed cuts rates in, for example, June, that means right now (before June) could be your best chance to lock in a higher APY on a CD.

CDs pay you a fixed rate of interest for the full length of the term. Savings account APYs are not fixed. The best high-yield savings accounts are currently paying 5.30% APY or more. But if the Fed cuts interest rates by 0.25% in June 2024, those yields will likely drop to 5.05% APY (or less) almost immediately.

But if you're locked in on a 1-year CD with 5.35% APY (the best 12-month CD rate as of this writing), your CD will keep paying that same rate of interest for a full year, and all that time, you'll be earning a higher yield than you could get in even the best savings account.

The best reason to open a CD in 2024: You believe that the Fed is going to cut interest rates, and you want to keep earning today's high APYs for as long as you can.

Why not open a CD in 2024: One big drawback

It's true that CDs often (but not always) pay higher APYs than savings accounts. But there's one big risk and downside to a CD: they charge penalties for early withdrawal. That's right -- CDs require you to lock up your money for the length of the term. For this reason, CDs are really not the right choice for many people's savings.

Why you shouldn't use a CD for emergency savings

Your emergency savings fund -- if you have one -- needs to be liquid (in cash) and immediately accessible. If you lose your job tomorrow or have a medical emergency or a car repair or otherwise need cash, you're going to want to be able to get that cash out of the bank ASAP.

CDs don't allow this level of flexibility. Most CDs will charge you an early withdrawal penalty if you pull your money out before the term is up. This penalty can often gobble up most of the interest you earned, which defeats the purpose of opening a CD in the first place; you might as well keep your money in a zero-interest checking account.

Why you shouldn't open a CD for short-term savings

Some people want to use CDs for specific short-term financial goals, like a down payment on a house, a new car, a vacation, or a wedding. But the inflexibility of CDs can make them a bad choice for these purposes, too.

What if your car breaks down and you need to shop for a new vehicle six months sooner than you expected? What if interest rates drop, making it easier to get an affordable mortgage, but your down payment money is tied up in a 2-year CD?

Sometimes people's financial plans change faster than a CD will allow. Are you sure you want to take that risk? (You might also consider a no-penalty CD for better flexibility -- but a lower APY.)

Why you shouldn't open a CD for long-term investments

Unless you are currently retired and you need CDs to generate steady income for you to live on in retirement, you should probably not have CDs in your IRA. There are better ways to invest your money, especially if you're still several years (or decades) away from retirement age.

For example, the best 5-year CDs are currently paying 4.00%-4.30% APY. If your investment time horizon is five years or longer, you can likely earn a higher return with a diversified portfolio of stocks and bonds.

Bottom line

I'm not a huge fan of CDs, and I'm not opening any CDs in 2024. But CDs can be the right choice for some people. If you want a fixed rate of interest on your savings, and you believe that interest rates are about to go down so far that a high-yield savings account will be a less attractive option, you might want to open a CD in 2024.