With the Federal Reserve expected to cut its benchmark interest rate sometime in 2024, now may be a good time to lock into a certificate of deposit while rates remain high.
With CDs, you deposit a specific amount of money for a fixed period of time — months or years — at a guaranteed rate of interest. While you can't prematurely withdraw those funds without paying a penalty, the trade-off is that CDs tend to offer higher interest rates than most savings accounts.
However, many young people don't use them. Less than 11% of Gen Zers and millennials use CDs, according to a 2023 survey by GOBankingRates.
The yield for 12-month CDs — which are loosely correlated to the Fed's benchmark interest rate — soared from a weighted average of nearly 0% in December 2021 to 5.16% as of December 2023, according to Federal Deposit Insurance Corporation data.
Currently, you can find 12-month CDs that pay close to 5.5% in interest with no money down. That's much higher than the average annual percentage yield you'll find for traditional savings accounts, which was 0.57% as of Jan. 16, 2024, per Bankrate. While high-yield savings might offer APRs more comparable to CDs, you can often find CDs with slightly higher rates.
Some CDs also offer higher yields than one-year Treasury bonds, which are comparably safe investments.
Many banks and credit unions offer CDs for a variety of terms, typically ranging from three months to five years, so it's easy to shop around for a good rate and term that suits your needs.
"Assuming the Fed plans on lowering rates this year, it's time to lock in," says Jay Zigmont, certified financial planner and founder of Childfree Wealth.
How to know whether a CD is right for you
CDs are a good low-risk option if you want to earn interest on cash savings that you intend to spend within a few months or years, like for a down payment on a home or college tuition.
Interest rates for CDs are fixed for the entire term, providing a known and guaranteed return. This ensures that the money you are saving will be there waiting for you when you need it.
That said, there are downsides, including penalties for early withdrawals. Depending on the account, you might have to pay a few months worth of interest, or, less commonly, a small percentage of the principal amount. In other words, CDs are not entirely risk-free.
Since the penalties for early withdraws can wipe out the interest you'd gain on the funds, you'll want to be careful that the time period for you CD lines up with when you'll need the money.
Another downside to be aware of is that you will incur federal taxes on any interest earned from CDs if it's more than $10, for the year in which it's paid.
"CDs are perfect for cash goals one to three years out," says Zigmont. Savers who "need the money before then may be best off with a high-yield savings account."
And "if it is going to be more than three years, they may be better off investing," he says.
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