Are CDs Worth It?

If you’re looking for a safe way to earn interest on your savings, a certificate of deposit, or CD, is worth considering. CDs tend to offer higher interest rates than savings accounts. And today’s best CD rates are far higher than the national averages.

CDs may not always be worth it though. They lack liquidity, and that potential drawback is something to consider before opening an account.

Pros and Cons of CDs

CDs have several advantages, but there are some risks to consider. Weigh the pros and cons of using a CD before deciding to open one.

Pros

• Security. CDs are a low-risk investment. Your deposit and interest earnings are FDIC-insured up to $250,000 per person, per account category.
• Higher interest. CDs often have higher interest rates than savings accounts. This can lead to more earnings over a shorter period of time.
• Few fees. Typically, the only fees associated with a CD are early withdrawal fees.
• Variety of terms. CDs are available in a variety of lengths, or terms. This allows you to personalize a savings strategy based on your goals and timeline.
• Fixed rates. Most CDs have fixed rates. So if you lock in a high rate now, it’s guaranteed for the duration of your CD. Knowing how much you’ll earn can help you save and budget for future expenses.

Cons

• Early withdrawal penalties. Most CDs penalize you for making withdrawals before maturity. These penalties can equate to several months’ worth of interest earnings or more. No-penalty CDs, which allow you to withdraw your entire balance at any time without penalty, are an exception—but they typically come with lower interest rates and fewer term options.
• Lack of flexibility. You typically can’t make withdrawals or deposits during your CD’s term. Be sure you will not need any of the money you deposit before the maturity date. And forget about plowing in more money once you’ve funded a CD.
• Potential for missing out. Locking in a fixed rate means you might miss out on potential earnings if interest rates rise in the future. Bump-up CDs are a special type of CD that allows you to take advantage of at least one interest rate increase throughout your CD term.

Are CDs Worth It?

CDs are a valuable financial tool, but they aren’t the best place for your money in every situation.

When CDs Are Worth It

CDs are a good choice if you have savings you won’t need to access for a specific period of time. In exchange for temporarily giving up access to your funds, you can often earn more in interest than you would with a savings account. If you don’t plan to touch the money during that time, it can be worth opening a CD to earn the extra interest.

CDs can also come in handy when you’re saving for a specific goal. For example, if you’re planning on a big vacation in two years and you have savings set aside specifically for that purpose, you could put that money into a two-year CD to earn interest in the meantime.

If CD rates are high and you expect interest rates to go down in the near future, a CD can be a particularly worthwhile place to stash any cash you won’t need for a while. You’ll be able to lock in a good deal while rates are up and continue earning above-average APYs even after rates decline.

When CDs Are Not Worth It

CDs aren’t the best option if you’re unclear about your savings goals or might need to access your funds in the short term. For example, you should not keep your emergency fund in a CD, because you never know when you might need that money. Even if a CD out-earns the interest offered by a savings account, it probably will not be worth it if you have to pay early withdrawal penalties.

On the flip side, CDs may not be worth it for long-term investing either. The long-term portion of your portfolio should be devoted to investments that are designed to grow over time, such as stocks and mutual funds. While CDs might offer better rates than savings accounts, they’re ultimately designed for stability over growth. Inflation often outpaces CD rates, which means that you could actually lose purchasing power in the long run.

Alternatives to CDs

While CDs have their advantages, they aren’t always the best place for your money. If you’re looking for another way to save, consider these CD alternatives.

High-Yield Savings Accounts

High-yield savings accounts are like traditional savings accounts that pay interest on your deposits, but they earn higher rates. Many high-yield savings accounts are offered by online banks and credit unions rather than traditional banks. As long as the institution has FDIC or NCUA insurance, your deposits are safe up to the coverage limits.

High-yield savings accounts offer more flexibility than CDs, though they may not earn as much in interest. With a high-yield savings account, there are no early withdrawal penalties, and you can make withdrawals and deposits whenever you want. But some financial institutions penalize you for making more than six withdrawals per month, so pay attention to withdrawal limits.

Money Market Accounts

Money market accounts blend the features of a savings account and a checking account. If your biggest concern with a CD is flexibility, a money market account may be a good alternative. Like a savings account, money market accounts may have transaction limits, but they often come with a debit or ATM card for convenient access to your money. Compared to a CD, money market accounts afford a lot more freedom.

Money market accounts tend to have higher interest rates than savings accounts, but they may not earn as much as CDs. They also often have high minimum balance requirements, and they may even charge monthly fees.

CDs can help accelerate your savings, but they’re not always worth it. If there’s a chance you’ll need access to your money during your CD’s term, consider a high-yield savings account or money market account. But if you have a pool of money you can afford to lock up, it may be worth capitalizing on high CD rates.

Frequently Asked Questions (FAQs)