Are short-term CDs a good investment in 2024? Experts weigh in
Interest rates have been high for the last year or so — particularly on short-term certificates of deposits (CDs).
But those days appear to be numbered. The Federal Reserve has lined up three potential cuts to its benchmark interest rate this year, and since savings account and CD rates closely follow the Fed rate, those could soon fall, too.
This begs the question: Are short-term CDs still a good spot to park cash in 2024? We asked a few experts to weigh in.
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Are short-term CDs a good investment in 2024?
Here's why - and why not - a short-term CD could be a good investment this year.
Yes, if you're opening one soon
If you're planning to open a short-term CD soon, then it's likely a smart move, as it could earn you more interest than a longer-term CD would.
"Currently short-term CDs have higher rates than long-term CDs," Jonathan Maula, owner of wealth management firm Castle Hill Capital in Virginia. "For CDs right now, the shorter the better. The highest rates for CDs are at three months, and the rates go down from there."
That's different than how CD rates normally shake out.
As Kevin Miller, president and CEO of Travis Credit Union in California, explains, "Historically, the longer the term the higher the rate. In today's environment, because of the need for liquidity, we're seeing financial institutions compete competitively for both short-term money and long-term money with high rates."
Still, it won't be this way for long. As the Fed begins reducing its benchmark rate, rates on both types of CDs will fall. According to CME Group's FedWatch Tool, the Fed will likely start rate cuts at its March or May meetings.
"When the Fed starts cutting the target federal funds rate, which appears likely to occur before the end of the first quarter in 2024, short-term CD rates will fall," says Ken Tumin, founder of DepositAccounts.com. "Even before the first Fed rate cut, there will likely be declines in short-term CD rates as market expectations rise for a cut."
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Yes, if you need access to the money soon (or aren't sure when you'll need it)
Often, the choice between a short-term or long-term CD comes down to timing — or, more specifically, the timeline on which you'll need to withdraw your money.
"When it comes to comparing short- versus long-term CDs, it's simple: It depends on the person and their time frame for when they may need that money," says Michael Arvay, CEO of Marvelous Retirement Planners in Toledo, Ohio. "You have to remember the key term is duration. If your dollars are locked up for when you need them, what good are they?"
Most CDs come with penalties if you withdraw your money before the account reaches full maturity. For this reason, you'll want a good idea of what you're saving toward — and when you want to achieve that goal — before opening one.
"Anyone that needs money for a short-term goal or is nervous about the stock market in the short-term can use CDs as a way to safely earn a solid return," Maula says. "If you need the money for a vacation this summer, a down payment for a house you'll be buying in the next year, or will be paying for your daughter's wedding this fall, those would all be great examples of using a CD to earn some interest while you wait."
No, if you're saving for a long-term goal
If you're looking to grow your money for a far-off goal, retirement or just for some long-term wealth building, then short-term CDs aren't usually the way to do it.
"You don't want to use short-term CD's if you're investing for a goal that is longer than three years out unless you are incredibly risk-averse," Maula says.
For long-term goals, you'll want a long-term CD, which would allow you to lock in today's interest rates for five or even 10 years.
If you have both short- and long-term goals you're shooting for, a CD ladder can also be a smart option. With these, you spread your initial deposit out across several CDs with varying maturity lengths. This ensures you have access to your funds regularly (when the short-term CDs mature), and also allows you the opportunity to reinvest those earnings in a new CD — potentially at a higher rate, if interest rates rise.
"Laddering is a great technique for folks who know when they will need to access funds at points in time but they're looking to maximize return to structure liquidity," Miller says. "They can map out, for example, that they'll need $10,000 this year and then $20,000 next year. They can then structure their money with that in mind."
Shop around for your CD
Whichever type of CD strategy you choose, make sure you compare several banks and credit unions before opening your account. While the current average CD rates range from 0.23% to 1.86%, there are many banks offering rates much higher than that. Some even have APYs of over 5%. As Tumin puts it, "You will likely miss out on the best rates if you don't shop around."
