July Might Be Your Last Opportunity to Snag a 5% CD. Here's Why

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I can totally see why 5% certificates of deposit (CDs) appeal to so many people. I mean, you're getting that 5% risk-free, provided you bank somewhere that's FDIC-insured and limit your deposits at that institution to $250,000 or less.

And sure, you could do better with a stock portfolio. Over the past 50 years, the stock market's average annual return has been 10%. But with stock investments, you're taking on risk. You could put $10,000 into the market only to see your balance fall to $8,000 a month later.

If you open a $10,000 CD, your balance can't fall below $10,000 unless you remove funds and incur an early withdrawal penalty. So it's easy to see why you might choose a CD over stocks, especially in the context of saving for a shorter-term goal.

But while today's CD rates may be super appealing, they also may not stick around as long as you'd expect. In fact, there's a chance CD rates will start to fall as early as August. So if you want that 5% CD, now's the time to act.

Why it pays to open your next CD in July

Why is it so urgent that you open a CD before the end of the month, as opposed to right after it? Well, there's a reason.

The Federal Reserve is scheduled to hold its next policy meeting on July 30 and 31. During that meeting, the Fed may decide to do something it's talked about since the start of the year -- cut interest rates.

The reason CDs -- and savings accounts , for that matter -- are paying such high rates right now is that the Fed raised the federal funds rate numerous times in 2022 and 2023 to cool inflation.

Since the Fed has been reasonably happy with the progress it's made in slowing the pace of rising living costs, it hasn't raised interest rates in 2024. In fact, the central bank has repeatedly said that it's looking to cut rates before the end of the year.

Now, we don't know exactly when the Fed will move forward with its first rate cut. But once that happens, we can expect CD rates to drop. The same holds true for savings accounts.

Of course, with a savings account, there's no such thing as locking in a guaranteed interest rate. But with a CD, that's a big benefit. So if you want to score a 5% return on a CD, you should open one before the Fed's next meeting, just in case late July is when the central bank decides that it's ready for its first rate cut of several.

Don't worry if you can't open a CD before the end of the month

If you're sitting on cash you've been earmarking for a CD, then it pays to open one before the Fed's next meeting. But if you don't have the money to open a CD quite yet, don't despair.

Just as the Fed's interest rate hikes were gradual in 2022 and 2023, its rate cuts are also likely to follow that pattern. This means that while CD rates might start to come down once the Fed begins cutting rates, they're unlikely to drop to a drastic degree.

To put it another way, let's say you won't be in a position to open your next CD until the end of the year. Even if you can't get 5% at that point because the Fed already cut rates once or twice, you may be able to lock in a 4.5% interest rate. That's still pretty darn good.

The point, rather, is that if you have the money today to put into a CD, and you've decided that a CD is the best place to park your cash, then you shouldn't delay. Waiting beyond the end of July could mean having to settle for less -- even if the difference is fairly minor.

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