Should You Move Money Out of Savings and Into a CD Before Rates Fall?

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For over a year, savers have been enjoying 5% CD rates , as well as rates in the 4% and 5% range for savings accounts. But the days of sky-high interest rates may be limited.

The Federal Reserve's benchmark interest rate is sitting at a 23-year high, but the Fed is soon expected to start cutting rates in response to cooling inflation.

In fact, the Fed is set to meet on Sept. 17 and 18, and there's a good chance its first rate cut of the year will come out of that meeting. From there, savings account and CD rates could start to fall.

You may be wondering whether you should move money out of your savings account and into a CD. But that all depends on the state of your emergency fund.

The upside of moving money into a CD

There are two main benefits to opening a CD. First, CDs tend to pay a bit more than savings accounts because you're committing to keeping your money in the bank for a preset period.

Second, with a savings account, the interest rate on your money isn't set in stone. With a CD, it is.

Sign a 12-month CD with an APY of 5.00% on a $5,000 deposit, and you're guaranteed to earn $250 in interest over the next 12 months. This predictability could help you plan and save better for short-term goals.

The downside of moving money into a CD

CDs might pay more than savings accounts and offer the benefit of guaranteed interest, but they also typically impose penalties for taking an early withdrawal.

If you put cash into a CD and end up needing it sooner than expected, you could lose a lot of money. It's possible for your CD penalty to be higher than the amount of interest you earned on that CD in the first place.

Should you move money into a CD this August?

There's a good chance that in roughly a month from now, the APY on your savings account will fall in line with a broad interest rate cut. Moving money into a CD this month protects you from earning less.

But before you make that move, you must figure out what your emergency fund should look like. Aim to have enough money in savings to cover three months of essential expenses at a minimum. If you spend $3,000 a month on essentials and have $10,000 in savings, you may be OK to open a $1,000 CD. But you should keep your remaining $9,000 in savings so it's available to you at all times.

Also, before opening a CD, think about other near-term financial needs you might have. If you've been saving for a new car because your current one is about to run out of steam, locking up funds for a vehicle down payment could be risky.

It's a nice thing to get a guaranteed interest rate out of a CD, and a higher rate at that. But it's not worth putting yourself in a position where you then don't have access to the money you need.

And remember, savings accounts are still paying nicely. And even once rates fall, it's not like savings account APYs are expected to plunge overnight. So all told, you may want to hold off on moving money out of savings unless you're confident that's the right move.

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