This Type of CD Could Be the Best One to Open This September

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The reason so many people have been rushing to open certificates of deposit (CDs) in September is pretty clear. CD rates are still sitting near record highs, but that may not last much longer.

The Federal Reserve is scheduled to have its next policy meeting on Sept. 17–18. The central bank is expected to introduce its first interest rate cut in years, so the days of 5% CD rates are unlikely to last much longer, especially since the Fed is likely to cut rates repeatedly in the coming year.

You may be thinking of opening a 12-month CD this September to score the highest interest rate possible for your money. But there's a different CD length you may want to consider instead.

It pays to think long-term

Some banks are still paying 5% on 12-month CDs. But for a longer-term CD -- one with a 48- or 60-month term -- you're likely looking at a lower APY. That doesn't mean a longer-term CD isn't right for you, though.

The benefit of opening a longer-term CD is that today's rates for these products are still strong. You can guarantee yourself a strong rate for a good number of years, as opposed to locking in a better CD rate for a single year and taking your chances.

Let's say you're saving for a goal that's about five years away, like college, so you don't want to invest your money in stocks because it's too risky on that short of a timeline. You also don't want to stick to a savings account because you want to earn a more predictable return on your money in the bank.

In this case, a CD fits the bill given your financial plans. But it could pay to open a 60-month CD at 4% rather than a 12-month CD at 5%. While you'll earn more money your first year with the 12-month CD, beyond that, it's anyone's guess. The 60-month CD could easily put more interest in your pocket all-in, especially as interest rates are expected to decline in the coming years.

As an example, say you're putting $10,000 into a 12-month CD with a 5% APY. You'll earn $500 in interest your first year. But the next year, you might only earn $315 in interest if you're only able to get a 3% APY on another 12-month CD. And then, as each year passes, the amount of interest you can earn every 12 months might dwindle.

On the other hand, a $10,000, 60-month CD with a 4% APY will pay you about $2,166 in interest. Is there a chance a 12-month CD will pay you more or the same if you keep renewing it for five years? Sure, but that's not at all guaranteed, and you may end up with much less. So if you want that security, consider a CD with a longer term.

A CD ladder is a smart move to consider

Given that CD rates are likely to start falling, it's important to look past the allure of a 12-month CD and consider a longer term if that aligns with a savings goal of yours. But another route you can look to take is setting up a CD ladder . This has you opening several CDs with staggered maturity dates, providing regular access to your cash as each CD matures.

In this case, you could consider a mini ladder where you split your deposit in half, putting 50% into a 12-month CD and the remaining 50% into a 60-month CD. Or, you could split your deposit into five and open a 12-month, 24-month, 36-month, 48-month, and 60-month CD.

There are lots of options to play around with.The point is to recognize the benefits of locking in a great CD rate for a longer period, even if it's not the best rate your bank offers.

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