Why you should open a CD with the longest term possible now
Certificate of deposit (CD) accounts come with various terms (or lengths) to choose from. Traditionally, interest rates on long-term CD accounts (longer than 12 months) have been higher than those on short-term accounts (those that mature in less than a year). But in the recent volatile rate climate in which the federal funds rate soared to a 23-year high, lenders have taken a different approach by offering higher rates on short-term accounts instead. While not dramatically higher than long-term CDs, the slightly better return has been a compelling selling point for many savers.
But the economy is changing again now.
Inflation fell again in June, the third consecutive month in which it did so. That brought it closer in line with the Federal Reserve's target 2% goal. And most experts expect a reduction to the federal funds rate when the Fed meets again in September, perhaps as much as 50 basis points. If that happens, rates on CDs and high-yield savings accounts will fall in tandem. Understanding this, then, savers should prepare accordingly and strongly consider opening a CD with the longest term possible now. Below, we'll detail why.
See how much more money you could be earning with a long-term CD here now.
Why you should open a CD with the longest term possible now
Not sure about opening a CD with a particularly long term? Here are three reasons why it makes sense to do so now:
Rates on these accounts are still high
You can get a 5.75% rate on a 3-year CD right now and a 5.72% rate on a 2-year option. That's a significant APY that could result in hundreds and even thousands of dollars in interest earned, depending on the initial deposit. Remember that the average savings account rate is just 0.45% currently, underlining the rare rate opportunity long-term CDs present now. But you'll need to keep your money in the account for the full term to earn that rate. Otherwise, it could get eaten up via an early withdrawal penalty.
See what long-term CD makes sense for you online today.
Rates will fall soon
This is the most important factor when considering opening a long-term CD now. Rates on CDs will assuredly fall when the federal funds rate is cut. But lenders don't need to necessarily wait for that to happen to start dropping their rate offers. And as a rate cut appears more imminent for the Federal Reserve September meeting, lenders may start doing just that.
So don't lose the opportunity. Remember, rates on CDs were just around 1% a few years ago. Today's rates are somewhat of an anomaly, so it behooves savers to act aggressively while they still can.
The rate is locked
Savings accounts have variable interest rates. So do high-yield savings accounts, money market accounts and high-yield checking accounts. CDs, however, do not.
By locking a high, long-term CD rate now, you are guaranteed to earn that high rate until the CD matures. And with CD terms as high as 10 years, that means substantial savings for years, if not a decade, ahead. So strongly consider opening a CD with the longest term possible now to keep earning high interest rates even as the rate climate adjusts downward again.
The bottom line
If you can afford it, a long-term CD is worth opening right now (even waiting until September may be too late). By pursuing a CD with the longest term right now, you'll still be able to secure a high rate, and you'll do so ahead of multiple predicted rate cuts ahead in 2024 and 2025. And because CD rates are locked, you'll earn the elevated rate you secure today for multiple years, even in the face of a volatile and perhaps significantly lower rate climate.
Don't hesitate. Lock in a long-term CD here now.
