Are CDs Worth it in the Current Market?

Certificates of deposit (CDs) may be worth it if you’re looking for a better return and don’t need frequent access to your money. A CD often offers higher interest rates than money market or savings accounts, but you’ll have to agree to keep your money locked up at the bank, which can be an issue if you need to withdraw your money early.

Savings accounts, money market accounts and CDs are all great options if you’re looking for a secure place to store your money while earning interest. You’ll need to weigh the pros and cons of a higher interest rate versus easy access to cash when comparing your options.

When are CDs worth it?

Over recent years, interest rates on savings accounts — and even some high-yield checking accounts — have increased, diminishing the appeal of CDs. However, a CD could still be a worthwhile option in certain circumstances, like saving for a specific short-term goal or if you think interest rates may fall.

You have a specific short-term goal

If you’re saving for a down payment, new car, wedding or other event and know when you’ll need the money, you could open a CD with a matching term. You’ll know exactly how much money you’ll get at the end of the term, which can make it easier to plan and budget.

When you open a CD, you’ll have to choose a term — the length of time your money will be locked up. CD terms can range from a few months to years, and a longer term is often rewarded with a higher interest rate. This gives you the opportunity to earn a slightly higher interest rate for longer-term goals on your hard-earned money than you otherwise would have if you just left it in a savings account.

You think interest rates may fall

You’ll lock in your CD’s interest rate when you first open the account. By contrast, the interest rate on your savings and money market accounts are variable and may drop over time. If you think rates are likely to fall, locking in the higher rate could be a good idea.

At the same time, beware of locking in too much of your money for too long to avoid incurring early withdrawal penalties on cash that you may need in the interim. Keep in mind that it’s always possible for interest rates to start rising even when you expect them to fall. It’s a good idea to hedge your bets when opening any CD account.

When you already have an emergency fund

If you’ve already saved up an emergency fund, a CD could be a great choice for growing your additional savings. If you place extra funds in a CD, you won’t need to worry about withdrawing these funds for a short-term emergency.

Of course, if you’re still building up your emergency fund, a CD might not be the right choice. You never want to be forced by emergency needs to take out a loan and pay interest, or cash out your CD early and pay an early withdrawal penalty.

When are CDs not worth it?

A CD won’t always be the right fit for your savings goals. Finding the best APY available for your savings, no matter what the account, should always be your main goal. Also, if you need frequent access to your savings, CDs are not worth it.

You can find a better rate elsewhere

You might find a money market account, savings account or high-yield checking account that offers a higher interest rate than a CD. The higher rate will lead to more interest, plus you won’t have to keep your money locked in the CD.

You want easy access to your money

If you don’t have an emergency fund, like to frequently move money between accounts or think you may need money in the short run, a CD might not be the best fit. Other types of accounts can offer similar returns and won’t charge you a fee for withdrawing your money.

You think interest rates will rise

Locking in your interest rate might come back to bite you if interest rates on other types of accounts are rising. This is known as interest-rate risk because you’re missing out on the potential gains that you would earn if you put your savings into a different type of account.

Compared to other account types, the biggest advantages offered by a CD include:

  • Higher interest rates than other deposit accounts
  • Steady and guaranteed interest payments
  • Little risk of losing your savings

You can open a CD with an FDIC-insured bank and up $250,000 in combined savings and interest will be insured by the federal government. The insurance means you won’t be risking your initial savings in the event that your bank becomes insolvent (you can open CDs at multiple banks to keep all your money protected if you have over $250,000).

CDs can also be structured to have periodic interest paid out to your checking account or reinvested into the same CD to earn more compound interest over time, based on your preference. The guaranteed interest payments can give you a steady income.

The security and consistency make CDs a good option for savers who are looking for guaranteed returns, such as retirees who are living off their savings.

What are a CD’s biggest disadvantages?

The biggest disadvantages of CDs are that you can’t withdraw the money whenever you want without paying a penalty. In addition, with a CD you’re locking in an interest rate over the term of the certificate.

Some banks do offer CDs that don’t have early withdrawal fees — they’re called no-penalty CDs — which remedies the first disadvantage. However, your options may be limited, and no-penalty CDs generally offer lower rates than other kinds of CDs.

There are also CDs that let you request an interest rate increase if interest rates are rising, called step-up CDs. A step-up CD could offer protection against interest-rate risk. However, there may be a larger initial deposit requirement and you might only be allowed to request one interest-rate increase over your CD’s lifetime.

Which CDs offer the best rates?

Before opening a CD, make sure you compare the current offers from different banks. The bank where you have your checking account might not offer the best CD rates. Particularly if you use a traditional, brick-and-mortar bank as online banks tend to offer higher rates.

You’ll notice that the annual percentage yield (APY) on CDs increases with the CD’s term. But there are other features to compare as well.

Banks’ CDs may have different minimum deposit requirements, which you’ll want to keep in mind as you determine which CD fits your needs. Some also offer a higher APY if you meet higher initial deposit thresholds, such as $10,000 or $25,000.

Here’s a comparison of different CDs’ APYs for a standard CD .

Bank6-month1-year3-year5-year
Ally Bank1.00%2.50%2.40%2.65%
Bank of America0.03%0.05%0.55%1.00%
Chase Bank0.02%0.02%1.30%1.40%
Citizens Access2.00%2.50%2.60%2.70%
Marcus by Goldman Sachs0.60%2.40%2.50%2.60%
Assumes rates current as of 8/20/2019. Table is for illustrative purposes only. Rates vary based on where you live.

How to build a CD ladder

Savvy savers who are looking to minimize the risks associated with CDs, without opting for lower-rate CDs, can opt to build a CD ladder rather than opening a single CD.

With a CD ladder, you’ll open a series of CDs that mature at specific intervals. For example, if you have $5,000 to save, you could open five different $1,000 CDs. The first has a one-year term, the second has a two-year term, and so on.

Although you likely will get a lower APY on a one-year CD than a five-year CD, one of your CDs will mature every year, giving you regular access to a portion of your money. The frequent maturities address the risk that you’ll need money in the interim by providing regular intervals where your funds are paid out while allowing you to earn interest beyond what’s available with current savings rates alone.

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