Here's Why You Should Open a 12-Month CD -- Even When Rates Are Falling

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Certificates of deposit (CDs) have recently been all the rage among bank depositors. And it's not hard to understand why. With CD rates surpassing 5.00% APY on short terms, many young savers have never had the opportunity to earn interest quite like this. Those who remember a similar surge of deposit rates in the late 2000s know it will be years -- or even a few decades -- before a similar opportunity will arise.

However, as you may have already noticed, the window to lock into a competitive CD rate is gradually closing. Many CD providers are expecting the Federal Reserve to start cutting its federal funds rate -- the reason for high CD rates right now -- as early as September. In anticipation of that inevitable rate cut, yields on the highest paying CDs have already started to slide.

Even as rates begin to decline, it's still a good time to open a 12-month CD, especially if you're confident a CD is the right account for you. Here's why.

Short-term CDs still offer the most competitive rates, but not for long

Simply put, earning 5.00% APY on a fixed-income investment for the next 12 months is an incredible opportunity, one not to take for granted. It wasn't too long ago that the best CD rates were under 1.00%; likewise, it might not be too long before CD rates hit that level once again.

To put it into perspective, imagine you have $10,000 in savings. If you were to leave that in a 12-month CD with a 5.00% APY, you would earn $500 over the course of your term. That $500 helps your savings keep pace with inflation, something that lower APYs may not have offered you.

Conversely, let's say you open a high-yield savings account with a 5.00% APY. You might think that your $10,000 would earn $500 in a year within this account, but you'd be overlooking one central feature of savings accounts -- their variable rates. Banks can change the rate on a savings account at any time and without notifying you beforehand. This differs from CDs, which have fixed interest rates and can guarantee returns, so long as you stay within the bonds of your contract.

Since it's likely that the Federal Reserve will cut its federal funds rate in 2024, savings accounts and new CD rates are in for a steady decline. Right now, short-term CDs (terms of 12 months or fewer) have the highest rates on paper. But if a rate cut happens, these same CDs will likely see their rates drop significantly.

While there aren't as many 12-month CDs paying above 5.00% APY, you can still find some on our list of best 1-year CDs . Again, these rates will likely change over the next few months, so if you want to earn 5.00% APY, it's imperative to lock into a CD that has that rate now.

Long-term CDs could also be a good investment

Even if they don't have the highest APYs, long-term CDs could also be a smart move right now. You'll freeze an elevated rate for several more years, and you won't have to worry about rates falling in 2024 (and beyond). This is especially true if you have savings sitting in a savings account. As long as you don't need that cash, you might as well lock in the higher rate while it's still here.

Let me emphasize: If you want to earn 5.00% APY for the next 12 months, now is the time to act. The Federal Reserve's next move could very well be a rate cut. Waiting another month to see what happens could mean settling for less interest.

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