You've got to hand it to the Federal Reserve. While the central bank's many interest rate hikes have driven up the cost of borrowing, those hikes have also led to some of the most outstanding CD rates consumers today have ever seen. In fact, some CDs are paying upward of 5.00%, which is amazing considering that you're looking at a mostly risk-free return.
But while I'm definitely interested in opening another CD this year before the Fed starts cutting interest rates, I won't be opening a 3-month CD. Here's why.
You're giving up flexibility for no good reason
A 3-month CD isn't a product you'll find at every bank. Many banks offer a 6-month CD as their shortest CD term. But in some cases, you can find a 3-month option. And you may be tempted to open one, because a 3-month CD doesn't require a huge commitment on your part.
When you open a 12-month CD, you have to wait a whole year before you can withdraw your cash without paying a penalty. That's a long time. But three months isn't a long time to tie your money up. You can more easily anticipate your upcoming expenses within the next three months than those that might be six or nine months away. So I totally get why a 3-month CD may seem optimal for some people.
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But personally, I just don't see the benefit. Alliant Credit Union offers a 3-month CD with a 4.25% APY. But my bank, Capital One, offers a 4.25% APY on its Capital One 360 Performance Savings account.
The way I see it, why would I open a 3-month CD that pays the same rate as my savings account? With a CD, I can't touch the money without being penalized. With a savings account, I can withdraw money whenever I need it. So if I'm giving up flexibility, there has to be a financial benefit.
Granted the 4.25% APY on my savings is not guaranteed, whereas a CD's interest rate is locked in. But I'm willing to take that risk over a three-month period. Even if my savings account's APY falls next month, or the month after that, it probably won't dip too much below its current level. So I feel that sticking with a savings account over a 3-month CD makes more sense.
A longer-term CD could pay off
While I don't think it pays to open a 3-month CD right now, a longer-term CD with a higher APY is a different story. As an example, Alliant is offering a 4.75% APY on a 6-month CD. That could be a better bet, because you're getting a much higher rate, and you're also not forced to commit to too long a time frame.
You may also decide to open a 5-year CD at 4.00%, even though the APY is lower than what many savings accounts are paying today. While I don't expect savings account rates to fall substantially in the next three months, five years is a different story.
Heck, in just a few years, we could end up back in the days of savings accounts paying just 1.00%. So the idea of guaranteeing a 4.00% return for five years is appealing to me.
Of course, you may have your reasons for opening a 3-month CD despite the drawbacks I just outlined. And that's totally fine. But to me, a 3-month CD just isn't worth the inconvenience.
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