I Never Thought I'd Open a CD. Here's What Finally Changed My Mind

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I'll be frank -- I like to keep my finances simple, and I've never considered certificates of deposit (CDs) to be the right account type for me. With high-yield savings account rates elevated now, and my personal rate being a fantastic 5.15%, I just didn't see the point in CDs.

But after hearing recently that the Federal Reserve expects the federal funds rate to be a full 2 percentage points lower by the end of next year, I began to question things.

What will I do next year if my savings rate has plummeted to the mid-3.00% range, or even lower? Will my chance to lock in the 5.00% rates of today be gone for good? Ultimately, my fear of missing out on locking in a high rate convinced me that opening a long-term CD at today's rates -- before they begin to drop -- would be worth it.

What's happening to rates?

The Federal Reserve raised rates 11 times beginning in 2022 to help fight inflation caused by the COVID-19 pandemic. As a result, rates on deposit accounts are some of the highest we've seen in more than two decades.

But the rate of inflation has decreased in recent months, so the Fed plans to begin lowering the federal funds rate as a result -- with the first cut expected next month at the Fed's September meeting.

When the federal funds rate begins to drop, rates on deposit accounts are likely to follow. While the federal funds rate will drop gradually over time (rather than all at once), it could be a good idea to lock in as high a rate as possible today, before that first decrease happens.

Taking that advice, I decided to lock in the highest rate I could find on a 5-year CD to guarantee myself today's APYs until August 2029. The rate I scored was a very respectable 4.30% (you'll find it on our 5-year CD list linked above). But what will that mean for my savings over that five-year period?

A couple scenarios

To better show what led to my decision to open a 5-year CD, let's take a look at a couple possible scenarios.

In the first scenario, I have $15,000 in a high-yield savings account earning 5.15% in year one, but dropping gradually each year thereafter -- a reasonable illustration of how rates could fall over the next five years.

As you can see, as my savings account APY gradually drops, so does my interest earned each year. At the end of five years, my savings account balance will be $17,765.97 and I will have earned a total of $2,765.97 in interest on my initial $15,000 deposit.

In the second scenario, I have that same $15,000 in a 5-year CD with a locked-in 4.30% APY for the duration of the term.

The trend in this scenario is the opposite. My APY stays the same, but my interest earned each year increases due to compounding interest. At the end of my 5-year CD term, I've earned $3,514.53 in interest for a grand total of $18,514.53 . That's about $750 more than I stand to earn in the first scenario.

Things to keep in mind about CDs

For me, running these numbers made the 5-year CD the slam-dunk option. But there are a few things to keep in mind if you're considering going the same route.

• You won't have access to your funds: Money you put in a CD needs to be left alone for the entirety of the CD's term. Put money you may need in the next five years in a high-yield savings or money market account instead where it will be accessible.
• Early withdrawal penalties apply: If it turns out you absolutely must withdraw your money before the CD term ends, you'll be subject to early withdrawal penalties. These vary by bank and CD term, but at the very least you'll lose a portion of your interest earned, which could nullify the whole reason for opening a CD to begin with.
• Rates are not guaranteed: OK, so your CD rate is guaranteed. Whatever rate you lock in now will stick until your CD term is over. But what I mean is that the federal funds rate (and corresponding deposit account rates) is only a projection of what could happen in the future. If the economy tanks or unemployment skyrockets before five years is up, we could very well see the federal funds rate start to inch back up instead of moving downward.

There's no surefire way to tell what rates will look like five years from now, or even by the end of next year. But we can make educated predictions.

It was based on those predictions that I took a gamble and made my own CD decision to cushion my savings from falling rates. Don't find yourself regretting your own savings decisions in the coming years; consider a long-term CD today.

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