Will CDs Be Worth It Once They Stop Paying 5%?

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If you've opened a CD in the past six months, you're no doubt in good company. Many people I know have made a point to take advantage of today's amazing CD rates. Heck, I'm one of them.

I know I can earn a better return than 5% on my money by investing it. But I don't always want to take on the risk of owning stocks -- particularly not in the context of saving for short-term goals.

So in that regard, CDs have made it possible for me to score a higher interest rate on my money in recent months. And I'll probably open at least one more CD this summer before rates start to fall.

But that leads to an interesting question. It's not exactly news that today's CD rates aren't the norm. And while CD rates could start to fall in the coming months, we're probably not talking about anything drastic.

To put it another way, CD rates are now at a high because the Federal Reserve spent much of 2022 and 2023 raising interest rates to cool inflation. With rate cuts on the horizon, we can expect CDs to start paying less in the next year. But we're not necessarily going to go from CDs with APYs of 5.00% to CDs with APYs of 3.00%. Rather, rates should fall gradually.

But at what point will CDs stop being worth it? Well, it depends.

CDs could still be a good bet for another 12 months

I don't have a crystal ball, so I can't predict with any sort of certainty how far CD rates will fall in the year following the Fed's first interest rate cut. But I'd be surprised if they fell below 3.00%, and there's a good chance rates will hold steady in the 4.00% range for many months after those rate cuts begin. That means CDs could still be a great deal for quite some time.

Of course, a return of 4% on your money isn't as good as 5%. But if you're talking about a situation where it's not safe to invest your money , such as if you're saving for a goal that's two years out and don't have ample time to ride out a stock market downturn, then you might as well take what you can get from a CD.

CDs may not be as desirable once rates truly come down

I can easily make the case for opening a CD with an APY of 4.00%, 3.00%, or maybe even 2.00%. But there may come a point when CD rates fall by a large degree and remain low for many years. That's the situation savers were in before the Fed started raising interest rates in 2022.

Under those circumstances, a CD might only make sense under limited circumstances. If you're saving for a one-year goal and can get 1.75% from a 12-month CD versus 1.00% in a savings account , then a CD makes sense. In that situation, you just can't take on the risk of investing that money in assets that might pay you more, but also lose value.

But if you're talking about a minor difference between what a CD will pay versus a savings account -- say, 1.20% versus 1.00% -- then you might as well keep your money in savings. That way, you get the flexibility to withdraw your cash whenever you want without a penalty.

All told, CDs make the most sense when you can get a return you're happy with, and when there's a notable difference between what they'll pay you versus a savings account. And CDs also make sense when you're saving on a short-term basis and can't take on the risk that comes with investing.

So will CDs be worth it once they stop offering APYs of 5.00%? Maybe.

But there's a difference between a CD paying 4.00% and paying 1.40%. So keep that in mind as CD rates fall in the future. Thankfully, it'll probably be quite some time before CD rates fall to a level that makes them hard to justify.

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