Why You Shouldn't Feel FOMO About Opening a CD at 5% APY
KEY POINTS
- The latest inflation data suggests that the Fed might cut interest rates in September 2024.
- Don't feel as if you're missing out on opening a CD based on possible future rate cuts.
- The best savings accounts offer similar APYs to the best CDs, but with better flexibility to access your cash without penalty.
The latest inflation data announced on July 11, 2024 suggests that inflation is slowing down and that the Fed might cut interest rates as soon as September. If rates go down soon, that means now could be a good time to open a CD.
As a result of possible looming Fed rate cuts, lots of people might be feeling antsy about missing their best chance to open a CD. Is now your last chance to open a CD with 5% APY? Don't let fear of missing out (FOMO) run your financial life. Unless you have a large amount of cash (like $100,000 or more), CDs are not automatically the best choice for your savings.
Here are a few reasons why it's OK to skip opening a CD in 2024.
1. Fed rate cuts are not guaranteed
Even if the Fed cuts interest rates in September, we don't know what will happen next. The Fed could cut interest rates by 0.25% in September, and then another 0.25% in December. It could cut interest rates by a total of 1% or more in 2025, or it could stop with a 0.25% rate cut and leave interest rates at a relatively high level (4.75%–5.00%) for a long time.
Our Picks for the Best High-Yield Savings Accounts of 2024
Capital One 360 Performance Savings
![]() APY
4.25%
Rate info
See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.
Min. to earn
$0
Open Account for Capital One 360 Performance Savings
On Capital One's Secure Website. |
APY
4.25%
Rate info
See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.
|
Min. to earn
$0
|
American Express® High Yield Savings
![]() APY
4.25%
Rate info
4.25% annual percentage yield as of August 24, 2024
Min. to earn
$1
Open Account for American Express® High Yield Savings
On American Express's Secure Website. |
APY
4.25%
Rate info
4.25% annual percentage yield as of August 24, 2024
|
Min. to earn
$1
|
UFB Portfolio Savings Account
![]() APY
5.15%
Rate info
To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts.
Min. to earn
$0
Open Account for UFB Portfolio Savings Account
On UFB's Secure Website. |
APY
5.15%
Rate info
To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts.
|
Min. to earn
$0
|
No one knows what the Fed will do -- not even the Fed. The economy can change fast. Inflation might come back. Other surprises could pop up in the job market data that could spur the Fed to leave rates at their current level. Don't assume that any time is the "right time" to open a CD based on the Fed's latest announcements. You should only open a CD if it's the right investment for your cash at the right time for your financial life.
And for many savers, CDs are often not the right investment.
2. CDs can cost you in surprising ways
When you open a CD, you have to commit your money for a certain term -- whether it's six months or one year or three years. In exchange for your commitment, the bank agrees to give you a fixed interest rate on your savings -- so even if the Fed slashes interest rates in the next few months, you'll keep earning the same high APY you signed up for until your CD term is over.
But here's the biggest risk and downside of CDs: early withdrawal penalties. If your plans change and you need your money sooner than expected, you have to pay a penalty to take your deposit out of your CD before the end of the term. This early withdrawal penalty can cost you most or all of the interest you've earned.
Unless you have a high level of financial security and do not need your CD cash anytime soon, early withdrawal penalties can be an unacceptable risk for most everyday people. The typical American savings account has only $1,200. If that's how much you're putting into a CD, it's not worth risking penalties just to earn a few extra dollars of yield on your savings.
And that's another problem with CDs -- the best CDs do not often pay much higher yields than the best savings accounts.
3. The best savings accounts are flexible and high-yield
If the Fed cuts interest rates soon, the yields on savings accounts will likely go down, too. Savings account APYs are not fixed like APYs on CDs. Your savings account might end up earning a lower APY after Fed rate cuts than you could've gotten from the best long-term CDs.
But one big advantage of savings accounts vs. CDs is that savings accounts are flexible. You can withdraw your cash without penalty. Your money keeps earning interest as long as you want, and the bank won't take that interest away from you if you need to withdraw your cash.
Flexibility and freedom are often worth paying for. Don't assume a CD is the best place for your savings -- leaving your money in one of the best savings accounts can keep your options open while still earning a pretty good yield, even if the Fed cuts rates.
Bottom line
FOMO is a bad reason to make risky investments in meme stocks or dodgy digital tokens, and it's a bad reason to open CDs -- even at 5.00% APY or higher. Yes, if the Fed cuts interest rates in a few months, high-yield CDs opened in July 2024 would turn out to be a slightly better deal than savings accounts.
But don't let the possibility of missing out on hypothetical future yields cause you to make the wrong decision with your money today. Most savers don't have enough cash to get the best benefits of the best CDs. The best savings accounts and money market accounts can give you similarly high yields and flexible access to your cash whenever you need it.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
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