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Why you should open a 3-month CD today

A 3-month CD could be an effective way to tap into today's high savings returns.  Getty Images

Rates have increased significantly over the last few years due to the Federal Reserve attempting to temper inflation. The trend started in March 2022, when high post-pandemic inflation levels led the Fed to increase its target federal funds rate. And, the Fed then opted to increase its benchmark rate several more times before pausing rate hikes temporarily.  

And, in general, that strategy appears to be working — at least somewhat. The inflation rate is cooling, but it hasn't quite reached the Federal Reserve's 2% goal. According to recent data, the inflation rate is now 3.1%

Nonetheless, as inflation moves in the right direction, the Federal Reserve has decided to keep rate hikes paused over the last few months, leaving the benchmark interest rate at a 23-year high. And, you may be able to use today's high interest rates to your advantage with the help of a 3-month certificate of deposit (CD) — which gives you an effective way to earn high returns on your savings. 

Get more out of your savings with a 3-month CD today.

Why you should open a 3-month CD today

A 3-month CD allows you to take advantage of today's high rates without having to lock your money up for more than a few months. Here's why this type of CD makes sense now: 

Rates are currently high on 3-month CDs

One good reason to open a 3-month CD right now is that APYs are high on the best accounts. Some of the best 3-month CDs are available at Popular Direct (5.00% APY) and Alliant Credit Union (4.25% APY). Both of these options have rates that outpace inflation, so you can use them to offset the losses from inflation and earn a positive return. 

Tap into today's high rates with a 3-month CD now

Rates are expected to drop in the future

At 3.1%, the current inflation rate is still above the Federal Reserve's 2% target. However, it's significantly lower than the 9.1% inflation rate from June 2022, which suggests that the Fed's efforts to hamper inflation are working. 

If inflation continues to cool, the Fed will likely reduce its target federal funds rate soon. In fact, many experts expect the Federal Reserve to start rate cuts in June.

And, if you were to open a 3-month CD today, it would mature in late May. At that point, you could reassess the inflationary environment and decide whether it makes sense to lock in a higher rate for a longer term.

CD accounts are generally safe

"CDs, or certificates of deposit, are typically a safe way to increase your savings rate of return especially if you are averse to investing in stocks or bonds," says Yosh Miller, CEO and founder of Hadley, a savings app. 

CDs provide safety in two ways. 

"When you open a certificate of deposit, you essentially deposit money with a bank that will give you a rate of return for an agreed upon term," says Miller. 

CDs typically come with FDIC or NCUA insurance, too, which protects you from losses of up to $250,000 per account in the event your financial institution becomes insolvent or goes out of business. 

CDs can promote savings discipline

A 3-month CD may also be an effective tool to help you achieve your short-term savings goals. For example, if you want to take a vacation in three months, you could deposit the money you're using to cover the expense in a 3-month CD. When you do, you'll agree to keep your money in the account for the entire term. 

If you tap into your CD early, you may have to pay an early withdrawal penalty. That could make it less appealing to tap into your funds early and increase the likelihood of meeting your savings goals. 

The bottom line

Inflation is still above the Federal Reserve's target and returns on leading deposit accounts are still competitive. It may be wise to open a 3-month CD to take advantage of today's rate environment ahead of any potential rate changes in June. 

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