4 big signs you should open a short-term CD this June

As summer approaches, many Americans are feeling the heat of the current economic climate. After all, the inflation issues that have persisted over the last couple of years have resulted in increased costs on essentials like groceries, gasoline and housing. And, the high interest rates meant to help temper inflation have further impacted many people's budgets, making it tough to make ends meet. 

If you're dealing with similar issues, you may be looking for ways to earn some extra money, whether that's picking up a side gig or taking on a part-time job to earn supplemental income. But one simple cash-earning strategy you may be overlooking is maximizing the returns on your savings. After all, the yields on high-yield savings accounts and certificates of deposit (CDs) increased in lockstep with the Fed's interest rate hikes over the last couple of years, and both now offer annual percentage yields (APYs) that were essentially unheard of when rates were near rock bottom.

And, while a high-yield savings account can be a good option for boosting your returns, opening a CD can be an even smarter move right now — especially if you opt for a short-term CD account. But how do you know if you should open a short-term CD rather than locking your money up for a longer term? Here are a few signs that indicate a short-term CD is the right move for you this June.

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4 big signs you should open a short-term CD this June

If any of the following signs apply to you, it could be wise to open a short-term CD before the end of June.

Sign #1: You want to earn more than you could with a savings account

While the average savings rate is a mere 0.45% currently, the APYs on many high-yield savings accounts now hover above 5% at some banks, which is a great rate of return on your money. However, the rates on CDs can still outpace them, especially when it comes to short-term CDs. 

For example, there are short-term CD options offering rates of 5.5% or more, like the 3-month CD from MutualOne Bank, which currently comes with a rate of 5.65%. And, there are many other short-term CD options offering similar rates today. So, if you want to earn more than you could with a high-yield savings account, and significantly more than you could with a regular savings account, that could be a sign that it's time to open a short-term CD this June. 

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Sign #2: You want flexibility in case rates climb in the future 

While inflation has been tempered from recent highs, there's a chance that the Fed may continue hiking interest rates throughout 2024 if inflation persists at stubbornly high levels. And, right now, it's anyone's guess as to what exactly occurs with inflation in the future. While the inflation rate dropped slightly from 3.5% in March to 3.4% in April, today's inflation rate is still well above the Fed's 2% goal. If the high inflation trend continues, there is a chance that another Fed rate hike could occur this year.

In turn, you may want to capitalize on the opportunity to earn even more interest if future rate hikes occur — meaning that you'll need some flexibility in terms of your CD account. By opening a shorter CD now, your money won't be locked in that account for very long before you have an opportunity to reinvest those funds at potentially higher CD yields, should rates keep climbing.

Sign #3: You're worried about locking in a rate on a longer term

On the flip side, you may be worried about the risks that come with locking in a rate on a long-term CD right now considering the current economic environment. And, if you are, that could be a sign that a short-term CD is a better option to consider this June. 

After all, longer-term CDs carry much greater interest rate risk comparatively in today's economy. For example, if you lock your money into a 5-year CD paying 4.8% today — which is one of the highest 5-year CD rates available now — and then rates grow to 6% over the next couple of years, you'll be stuck earning that lower rate for years to come. But investing in a shorter term length allows you to minimize this interest rate risk, as you can determine which move is best for your money after your CD matures.

Sign #4: You need to curb your impulse spending 

Let's face it — when your money is just sitting in an easily accessible savings account, it can be tempting to dip into those funds for impulsive and unnecessary purchases. But when your cash is locked away inside a CD for a set term length, it instills a dose of financial discipline by restricting your ability to easily access and spend that money on a whim. 

And, by opting for a shorter-term CD, you'll remove some of that temptation, as dipping into the funds you've deposited into the CD account before it matures will typically come with costly early withdrawal penalties. And, by opting for a short- rather than a long-term CD will also ensure that you have access to your funds in case you need it.

The bottom line

There's no question that a CD account is worth considering in today's unusual economic environment, especially if you want to earn some extra cash on your money without much effort. But while both short- and long-term CDs are offering attractive rates right now, there are a lot of reasons to consider a shorter-term CD account in particular. And, if any of the signs outlined above seem familiar, it could indicate that you should consider opening a short-term CD this June. Just remember to weigh all of your options and consider your investment goals, budgetary constraints and other financial factors before you do to ensure that you're making the right move for your money.