After seeing her savings account rate decrease this summer, Anna Sergunina wanted to control the rate on some of her emergency fund.

Sergunina, a certified financial planner, knew a short-term CD would give her this opportunity.

“I just noticed the rate drop on my savings account and wanted to lock in a higher rate,” Sergunina says.

Rates on top-yielding savings accounts and money market accounts began decreasing in June and have continued to drop in response to the Federal Reserve lowering short-term interest rates twice.  Savings yields could fall further if there’s another rate cut at the end of the month.

Many top-yielding CD rates have also been declining, but you can still lock in a short-term CD right now to protect yourself from additional rate cuts.

Why you should consider a short-term CD

While the markets are always changing, many expect at least one more rate cut in 2019, says Adam Stockton, director of consumer pricing at Novantas.

“As we speak with folks around the industry, that seems to be what most people are planning for — probably an additional cut this year,” Stockton says. “And there’s less certainty for 2020. But potentially a couple more, one or two more [cuts] in 2020.”

Trying to time CD APYs, however, probably isn’t worth it — or easy to get right.

“I never assume that I can outthink the market,” Stockton says. “There’s just so much uncertainty in the world and my own personal perspective has always been if I try and outwit what the market’s going to do or where it is, maybe I’ll end up ahead and maybe I’ll end up behind.”

For instance, some people might have held out for higher CD rates in December — a time when rates were projected to rise. Instead, almost a year later, there have been multiple rate cuts for the first time in a decade.

If CD rates do move after the next Fed meeting, they will likely move lower.

Greg McBride, CFA, Bankrate chief financial analyst, says if you’ve been on the fence, it’s time to get off the fence and move. “Rates are already falling and will just continue to [fall] in the weeks to come,” McBride says.

Generally, CDs offer a fixed annual percentage yield (APY) for the term of the CD. You can still find one-year CDs paying more than 2.15 percent APY at some online banks. You can even find top-yielding CDs that require a low or no minimum deposit.

“If you can afford to live without the money for a period of time, locking in a CD will put a floor under your rate of return in a falling interest rate environment,” McBride says.

Keep the CD terms short, though. Some top five-year CDs currently offer around 2.5 percent APY, but the extra yield isn’t worth locking up your money beyond one to two years.

“Yes, rates might drop. But even then, you’re earning something in the neighborhood of 2.5 percent,” McBride says.  “If we end up having a recession, there’s going to be a lot of other assets that go on sale. You may find a better use for that cash that brings in a lot more than 2.5 percent at the time.”

When a short-term CD makes sense

A short-term CD is a great place to earn a fixed APY on money you won’t need to access until after the term expires.

Most high-yield CDs charge early withdrawal penalties. If there is a chance you’ll need the money, stick to a savings account or money market account.

“My advice to consumers is always make a decision you’d be happy to live with no matter what happens,” Stockton says.

A no-penalty CD is also a potential option for those who might be avoiding CDs due to early withdrawal penalties.

Factors to consider when shopping for a CD

It pays to consider these important factors when searching for a CD:

  • APY: The amount of interest that you’re going to earn is the top reason why you’re getting a CD. Make sure you compare rates to get a competitive yield. Getting a yield that’s more than 2.2 percent APY on a CD that’s for two years or shorter shouldn’t be difficult.
  • Minimum opening deposit/balance requirement: Make sure the money you want to deposit in a CD aligns with the minimum balance requirements. There are options that offer both a low minimum balance requirement and a competitive APY.
  • Purpose of the money: If this money is earmarked for buying a house in the near future, then a CD probably isn’t the right place for these funds. But if you’re not planning to spend the money within two years, a two-year CD — or a CD with a shorter term — may be the appropriate place for this cash to grow with a fixed APY. A CD also isn’t the best place for money that you will likely need in the short term.
  • Early withdrawal penalties: Find out the CD’s early withdrawal penalty. Better yet, make sure you’re putting an amount in a CD that you’re unlikely to need during the CD term. If that means putting a little less in the CD — and putting a portion in a savings account instead — that’s a sound strategy.

Keep track of when your CD is going to mature so that you can evaluate whether the APY changed at the end of your term. Even if the rate increases, you could find a higher rate elsewhere. Shop around before committing.

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