Why You Shouldn't Feel FOMO About Opening a CD at 5% APY

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The latest inflation data announced on July 11, 2024 suggests that inflation is slowing down and that the Fed might cut interest rates as soon as September. If rates go down soon, that means now could be a good time to open a CD.

As a result of possible looming Fed rate cuts, lots of people might be feeling antsy about missing their best chance to open a CD. Is now your last chance to open a CD with 5% APY? Don't let fear of missing out (FOMO) run your financial life. Unless you have a large amount of cash (like $100,000 or more), CDs are not automatically the best choice for your savings.

Here are a few reasons why it's OK to skip opening a CD in 2024.

1. Fed rate cuts are not guaranteed

Even if the Fed cuts interest rates in September, we don't know what will happen next. The Fed could cut interest rates by 0.25% in September, and then another 0.25% in December. It could cut interest rates by a total of 1% or more in 2025, or it could stop with a 0.25% rate cut and leave interest rates at a relatively high level (4.75%–5.00%) for a long time.

No one knows what the Fed will do -- not even the Fed. The economy can change fast. Inflation might come back. Other surprises could pop up in the job market data that could spur the Fed to leave rates at their current level. Don't assume that any time is the "right time" to open a CD based on the Fed's latest announcements. You should only open a CD if it's the right investment for your cash at the right time for your financial life.

And for many savers, CDs are often not the right investment.

2. CDs can cost you in surprising ways

When you open a CD, you have to commit your money for a certain term -- whether it's six months or one year or three years. In exchange for your commitment, the bank agrees to give you a fixed interest rate on your savings -- so even if the Fed slashes interest rates in the next few months, you'll keep earning the same high APY you signed up for until your CD term is over.

But here's the biggest risk and downside of CDs: early withdrawal penalties. If your plans change and you need your money sooner than expected, you have to pay a penalty to take your deposit out of your CD before the end of the term. This early withdrawal penalty can cost you most or all of the interest you've earned.

Unless you have a high level of financial security and do not need your CD cash anytime soon, early withdrawal penalties can be an unacceptable risk for most everyday people. The typical American savings account has only $1,200. If that's how much you're putting into a CD, it's not worth risking penalties just to earn a few extra dollars of yield on your savings.

And that's another problem with CDs -- the best CDs do not often pay much higher yields than the best savings accounts.

3. The best savings accounts are flexible and high-yield

If the Fed cuts interest rates soon, the yields on savings accounts will likely go down, too. Savings account APYs are not fixed like APYs on CDs. Your savings account might end up earning a lower APY after Fed rate cuts than you could've gotten from the best long-term CDs.

But one big advantage of savings accounts vs. CDs is that savings accounts are flexible. You can withdraw your cash without penalty. Your money keeps earning interest as long as you want, and the bank won't take that interest away from you if you need to withdraw your cash.

Flexibility and freedom are often worth paying for. Don't assume a CD is the best place for your savings -- leaving your money in one of the best savings accounts can keep your options open while still earning a pretty good yield, even if the Fed cuts rates.

Bottom line

FOMO is a bad reason to make risky investments in meme stocks or dodgy digital tokens, and it's a bad reason to open CDs -- even at 5.00% APY or higher. Yes, if the Fed cuts interest rates in a few months, high-yield CDs opened in July 2024 would turn out to be a slightly better deal than savings accounts.

But don't let the possibility of missing out on hypothetical future yields cause you to make the wrong decision with your money today. Most savers don't have enough cash to get the best benefits of the best CDs. The best savings accounts and money market accounts can give you similarly high yields and flexible access to your cash whenever you need it.

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