Today, interest rates are very high, as the country’s central bank (the Federal Reserve) raised the benchmark rate 11 times between March of 2022 and July of 2023. Because interest rates are near record highs, it’s possible to earn a very competitive return on a high-yield savings account. In fact, some accounts currently offer rates above 5.00%.
The Federal Reserve has indicated it intends to reduce rates this year, as long as economic trends show inflation has cooled and that prices will rise at a more sustainable level. These rate cuts could even happen before summer, although the Fed has so far declined to cut rates during its 2024 meetings.
If rate cuts happen, then high-yield savings accounts are likely to offer lower interest rates to customers. These accounts have variable rates, and they aren’t going to keep offering the returns they provide today if market conditions change.
The good news is, there is something you may be able to do to keep your higher return without putting your money at risk.
Could this option help you to keep your high rate?
If you want to make sure you don’t lose the chance to earn competitive yields on your money, you may want to seriously consider putting some of it into a certificate of deposit (CD).
See, CDs are like savings accounts in an important way. They are FDIC insured, so you can’t lose your money (unlike when you invest in a brokerage account and buy stocks that could see prices go up or down). When you put money into a CD, you aren’t taking risks with it, so it’s a good place for funds you may need in the coming months or years.
But CDs are different from savings accounts in that your rate is locked in. You agree to a CD term, such as three months, one year, three years, or five years. During that time, you earn the returns you were promised upfront. So, if you open a CD now — and especially one with a longer term lasting several years — you can make sure you keep getting the highest return on investment (ROI) possible from this risk-free investment, even if the Fed does cut rates.
The downside, though, is that you have to agree to leave your money invested for the duration of the CD term. Otherwise, you’d face penalties often equal to several months of earned interest. So, you should look for a CD with a term length you are comfortable with. If you have money you’re saving for something you’ll need a year from now, for example, a 1-year CD makes sense.
Should you open a CD to keep your rate high?
Opening a CD can definitely help ensure your ROI on your savings doesn’t fall even if rates change across the board. But you should only put money into it that you are sure you won’t need to access until the CD term ends to avoid those penalties mentioned above. This means, for example, that a CD isn’t a good place for something like your emergency fund that you may need to access at any time.
You should also avoid putting money into a CD that belongs in the market. Even though CDs offer competitive yields, you can do better in an S&P 500 index fund if you’re a long-term investor. The S&P has consistently produced 10% average annual returns over the long term, which is higher than what CDs offer. So, if you won’t need the money for five years or more, it should be in a brokerage account, not a CD.
But if you do have the right timeline and funds you want to earn a good return on that you’ll need anywhere from three months to five years into the future, opening a CD with that money right now could be a good move. It’ll ensure you maintain access to today’s generous rates, even if the Federal Reserve takes action to lower them.
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