As the Fed begins their rate-cutting cycle, it is a good time to consider parking idle cash in a Certificate of Deposit (CD).. Following rate cuts, the yields offered by financial institutions on deposits in High-Yield Savings Accounts (HYSA) and CDs typically fall rather quickly.
The benefit of parking money in a CD over leaving it in a HYSA is that your interest rate is guaranteed for the life of the CD. This of course assumes that you do not pull the money out early, which often results in the loss of some of the interest that has accrued (No Penalty CDs being the exception).
As the rates on bank deposits go down, so does your reward for leaving the money idle. Consequently, there is an increase in opportunity cost, as you could be earning better returns elsewhere.
As I commonly argue, cash serves as an important cushion against unexpected costs and the unpredictability of life. It also offers opportunity to take advantage of underpriced assets in the event of market volatility.
Final Note
Having just performed this exercise myself, I left a certain portion of money in cash (emergency fund) and moved the rest into CDs of varying duration (ex.18-months, 3 years).
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