Should You Open a 12-Month CD in August 2024?

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There's a reason 12-month certificates of deposit (CDs) are a pretty popular choice among savers these days. Thanks to record-high CD rates , you may be in a position to score a 5% APY on a 12-month CD. With a $2,000 deposit, you're looking at $100 in interest earnings after a year.

This August also happens to be a great time to open a CD because rates have the potential to start falling in September. The Federal Reserve is next set to meet on Sept. 17 and 18. Based on recent economic news, it's likely to start cutting interest rates at that upcoming meeting.

Once that happens, 5% CD rates may be a thing of the past (though to be clear, CD rates shouldn't plummet -- they just may not be as high).

If you have spare cash, you may be thinking of opening a 12-month CD this August. But should you? It depends. Running through these important questions can help you find out.

1. Is my emergency fund complete?

Any money you have earmarked for emergency fund purposes should stay in a savings account . That's because there are usually penalties for taking an early CD withdrawal, and you need the option to access your emergency cash at all times. If you're not sure you're all set as far as your emergency fund goes, then it's not a good time to open a CD.

The general guidance is to have enough emergency savings to cover three to six months of bills. But let's say you spend $2,500 a month and have $10,000 in savings. You could put $7,500 in savings as your three-month emergency fund and put the remaining $2,500 into a CD. But you may feel more comfortable with $10,000 for emergencies, and that's fine.

Don't feel any sort of pressure if you'd rather err on the side of having more money for the unexpected.

2. Is there a goal or need I'm saving for that may come up sooner than expected?

If you're saving for a goal or need you expect to arise toward the end of 2025, then a 12-month CD could be a good bet right now. But first, make sure your timeline is accurate.

You may assume that your older car will last for another 15 months or so before it'll need to be replaced. But are you sure? You don't want to tie up money in a 12-month CD and then have to get a new car next June, as you'd be stuck paying an early withdrawal penalty.

Think carefully about your needs and goals. In this context, it could pay to be pessimistic and assume you'll need your money sooner than expected.

3. Am I saving for a goal that's more than five years away?

A 12-month CD could be a good solution for saving for a short-term goal. But if you're saving for a goal that's five years away or more, investing in stocks is a better bet.

You don't want to invest in stocks on a shorter-term basis because then you may not have enough time to ride out a downturn. But if you're looking at opening a CD to help pay for college for your three-year-old, then you have time to ride out a stock market slide.

And you should know that while a 12-month CD might pay you 5% today, the stock market's average annual return over the past 50 years has been 10%. That accounts for good years and bad.

4. Is there a specific purchase that could greatly improve my quality of life?

One benefit of opening a CD is that you may be less tempted to withdraw your money for a nonessential purchase. With a savings account, there's no penalty to worry about so it's easier to tap your cash reserves when you want to. But before you put money into a CD, think about whether that cash can immediately improve your quality of life.

Maybe your slow, aging laptop is a source of daily frustration. Maybe you could really use some stress relief and there's a yoga studio around the corner offering a year of unlimited classes for $999. Or maybe you're tired of sleeping on an older mattress and could use an upgrade.

Spending money on purchases that make a difference in your life doesn't make you frivolous. It's a great thing to save money, but it's also perfectly okay to invest in your physical and mental well-being. You don't want a CD to stop you from doing that.

While it's generally a great time to open a 12-month CD, there are some exceptions. And if any of these apply to you, hold off on opening a CD -- even if it means missing out on a 5% APY and having to settle for a lower one down the road.

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