Why a CD may be better than a high-yield savings account in 2024

If you're looking to start saving in 2024, your first instinct may be to open a high-yield savings account and put a big chunk of money into it. That's not necessarily a bad intuition – high-yield savings accounts are a great way to earn interest and rates are fairly high right now. If you look at the forecast for the coming year, though, it becomes apparent that there may be a better option to make the most of your savings in 2024 – using a certificate of deposit (CD). 

Below, we'll break down why you should consider opening a CD if you want to earn the most interest possible this year.

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Why a CD may be better than a high-yield savings account in 2024

Both CDs and high-interest savings accounts are safe and secure ways to use your money to earn interest – they are each protected by the FDIC, meaning even if your bank fails, your principal will be protected at values of up to $250,000. If you are looking to maximize interest, though, a CD may be the better option right now. Here's why:

Rates for both are high – but could be coming down soon

Interest rates for both high-yield savings accounts and CDs are high right now. This is due to repeated actions by the Federal Reserve raising the federal funds rate in order to fight inflation. While the Fed does not set the interest rates offered by consumer banks directly, these rates do tend to track alongside the rate set by the Fed. 

The Fed's fight has been fairly effective, with the inflation rate coming down significantly since its peak in June 2022. In response, the Fed has kept rates paused for the past three meetings and given indications that up to three cuts totaling 0.75% could be coming in 2024. This would likely cause rates for both CDs and high-yield savings accounts to come down.

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CD rates are locked in – but savings rates are not

When you open a CD, you are locking in your rate for the entire term. This means that if you open a CD right now and get a rate of 5.50% – a rate that is currently available at some banks – you will get that interest rate for the entire term of the CD. Even if your bank drastically reduces the rates it is offering for CDs, you'll earn the rate you had when you opened the account no matter what.

With a high-yield savings account, on the other hand, the rate will be variable. When your bank lowers the interest rates it offers for high-yield savings accounts, you'll start earning less as well. 

With interest rates likely to go lower sooner rather than later, a CD figures to earn you more interest than a high-yield savings account. 

"If this is for money in cash reserves, then buying a 1-year CD is useful to lock in current rates for that money," says Erik Nero, a financial advisor with First Step Wealth. 

There is a tradeoff

There is one major tradeoff to remember when choosing a CD over a high-yield savings account – liquidity. With a high-yield savings account, you can access your money whenever you need it. On the other hand, when you open a CD, you are agreeing to keep your money in the account for the entire term of the CD. There are generally steep penalties that come with taking money out of a CD before the term is up.

If you are sure that you won't need the money you're depositing during the term of the CD, you're in the clear. If you aren't, though, you could consider splitting the money so that some of it gets the benefits of a CD while some of the cash remains available in an emergency.

The bottom line

With interest rates high but likely to go down soon, a certificate of deposit may make more sense for you right now. You'll get your interest rate locked in, even if rate cuts are coming. Just make sure you are comfortable locking that money away, as there are often penalties for taking money out of CDs early.