If you’ve been tracking CD rates, you may be aware that they’ve been pretty darn good this year. So have savings account rates, for that matter.
But the difference is that with a CD, you’re guaranteed the same interest rate for the duration of your CD’s term. With a savings account, your rate could change at any time.
On the other hand, with a CD, you have to commit to keeping your money tied up for a preset period of time. If you cash out a CD early, you risk costly penalties.
Because of this, I try to be careful about opening CDs. And I usually won’t open one unless there’s a compelling reason.
Recently, however, I made the decision to open a 10-month Capital One 360 CD, where I was banking already. Here’s why.
1. The rate was really good
I recently locked in a 5.30% APY on a Capital One 360 CD. That’s a notch above the other rates I was seeing and a really competitive one historically. And so I wanted to capitalize on it.
I’m also convinced that CD rates are going to start to fall in 2024. I think the Federal Reserve is going to start cutting rates as inflation continues to cool. And from there, it may get harder to lock in a rate as high as the one I just snagged. If you’ve been waiting for the right time to open a CD, you may want to act sooner rather than later — before rates begin to drop.
2. The term isn’t so long
My big hesitation in opening CDs is having to commit to keeping my money in the same place. But I was able to snag a 5.30% APY on a 10-month CD. To me, that’s not a scary amount of time to have my money tied up.
I also happen to have a fully-loaded emergency fund in a regular savings account. That’s cash I can tap for unplanned bills. Because of this, I’m not worried about tying up my money.
To be clear, you should never put your emergency fund into a CD — even a short-term one. But if you have a separate emergency fund, then a CD becomes less risky.
3. I don’t need the money for other things, so I might as well earn more interest
Not only is the money I just put into a CD separate from my emergency fund, but it’s also money I don’t have a particular need for. What I mean by this is that I have separate accounts for expenses like vacations and home improvements. And I don’t expect to make other large purchases soon, like buying furniture. So the way I see it, if I have some spare cash lying around, rather than just keep it in regular savings, I might as well earn extra interest while I have the opportunity.
Before you open a CD, though, really think about what use you might have for that money. You don’t, for example, want to have to put off a purchase like a new car you could really use because your money is locked up at the time.
Although I’m not always so quick to open CDs, my recent 10-month CD made a lot of sense for me. But think through the pros and cons each time you’re tempted to open a CD. And also, shop around for rates before committing so you get the best deal out there.
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