My 5-Year CD Stands to Earn Me Nearly $700 More Than My High-Yield Savings With Rates Set to Fall
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We've reached a pivotal time for making decisions when it comes to our savings. With the Federal Reserve expected to begin dropping the federal funds rate next month and predictions that it will fall approximately 2 full percentage points through next year, it could be now or never for folks looking to lock in high APYs.
The best high-yield savings accounts are offering APYs upward of 5.00% right now. Sounds pretty great, right? The problem is that those rates are variable and can change at any time. They tend to move in tandem with changes to the federal funds rate, so once that rate begins to drop, so too will your savings APY.
That's why I recently made the decision to lock $15,000 of my savings into a 5-year CD. By taking advantage of one of the best certificate of deposit (CD) rates available now, I'm guaranteed my APY until the end of my CD term, regardless of how rates fluctuate during that time.
Let's take a look at how my finances stand to benefit from my decision.
High-yield savings over the next five years
Without a crystal ball, we have no idea what savings account rates will look like in five years' time. But we do have the Fed prediction of a 2-point drop by 2026.
So starting with my current savings rate of 5.15%, using that prediction, and assuming a continued gradual drop thereafter, we might see interest earnings similar to the following:
Savings account APY | Interest earned on $15,000 starting balance |
|---|---|
5.15% year 1 | $791.00 |
4.00% year 2 | $643.35 |
3.15% year 3 | $525.22 |
2.75% year 4 | $472.31 |
2.25% year 5 | $396.29 |
Total | $2,828.17 |
Data source: Author's calculations
Don't get me wrong, this isn't a bad number to see your savings balance grow by over the course of five years without lifting a finger. But again, these are just estimates, and if rates fall further or faster, you can expect to earn significantly less.
5-year CD earnings
As it stands, I was able to lock in a 5-year CD APY of 4.30%. Let's take a look at my guaranteed interest earnings with this account:
5-year CD APY | Interest earned on $15,000 CD deposit |
|---|---|
4.30% year 1 | $645.00 |
4.30% year 2 | $672.73 |
4.30% year 3 | $701.67 |
4.30% year 4 | $731.83 |
4.30% year 5 | $763.30 |
Total | $3,514.53 |
Data source: Author's calculations
After five years untouched in my CD, my $15,000 deposit will balloon to $18,514.53. That's a difference of $686.36 compared to our savings scenario above.
And that's guaranteed money. I don't have to keep a close eye on rates over those five years or worry about moving my savings to a higher-paying account every time my current savings account rate takes a dive. No muss, no fuss!
Some stipulations
Despite the guaranteed rates, investing in CDs isn't for everyone. Consider keeping your money in high-yield savings or even in a brokerage account if either of the following apply to you.
If you'll need access to your cash in the next few years
Savings rates won't bottom out overnight. If you're going to need easy access to your money for emergencies or even planned expenses in the short term, then a CD is not the ideal place for your funds. Early withdrawal penalties will quickly eat up your interest earnings if you must break your CD term early.
You have a longer investing time horizon than five years
If your finances are in a solid place and you know without a doubt you won't need your extra saved cash because you have a separate emergency fund and sufficient sources of income otherwise, then consider putting your money in the stock market instead.
Sure, 4.30% APY sounds pretty good for the next five years with the forecasted rate decreases on deck. But historically speaking, the S&P 500 has seen gains of around 10% over the long term, far outpacing even the best long-term CD rates.
Why be content with an ending balance of $18,500 in a CD when you could have over $24,000 after five years in a brokerage account, nearly $39,000 in 10 years, and over $100,000 in 20 years with 10% average returns?
No clear-cut solution for every saver
Consider your personal circumstances, do some quick, back-of-napkin math (or use a handy online calculator to aid you), and determine which type of account is best for your savings.
Short-term savers will likely be best served by savings accounts, while long-term savers should err toward investing in stocks. But for those looking for a solid mid-term investment, ding ding! -- CDs could be the winner.
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