Are CDs Worth It?

You'll have to consider the pros and cons to decide for yourself.

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With so many savings vehicles on the market, you have to choose strategically to best grow your funds. For many options, you must consider fees and liquidity along with interest rates. CDs, or certificates of deposit, have their advantages, but they're not for each person or scenario. Compare your goals to the strengths of CDs to determine if it'll be worth locking your money up.

What is a CD?

CDs are savings products that offer a guaranteed, predictable rate of return for a fixed period of time, usually between three months and five years. CDs often offer a higher interest rate than a traditional savings account, but the money must remain untouched for the entirety of a CD's term or borrowers risk penalty fees or lost interest. 

To open a CD, you need to deposit a minimum amount of money, which varies depending on the CD and bank. In most cases, CDs don't charge any fees, but if you withdraw the funds in your CD before the maturity date, you will be charged some form of penalty fee. You can open a CD online or in person at a bank. Some types of CDs, like retirement CDs, have tax benefits.

Pros of CDs

If the benefits of CDs match your goals and risk tolerance, they may be a good option for your savings.

  • Fixed interest rate: The interest rate on a CD is fixed for the length of the CD, regardless of changes in market rates. That means that even if interest rates decline, your rate won't change until your CD matures. Your rate of return is entirely predictable.
  • Higher interest rates: Generally, CD rates are higher than what you'd find on standard savings accounts and money market accounts. But be sure to shop around to find the most competitive offers.
  • Funds are insured: Make sure your bank or credit union is federally insured. The FDIC, or Federal Deposit Insurance Corporation, and the NCUA, or National Credit Union Administration, each insure depositors on up to $250,000 per bank or credit union and account type.

Cons of CDs

If the cons of CDs seem like they would cause hiccups in your finances, you may decide on a different savings product.

  • Limited access: Because of the restrictions on withdrawals, CDs pose a liquidity issue for some savers. You can't withdraw your money without penalty until the CD reaches maturity.
  • Taxes: Interest you accrue on CDs will be subject to federal and state tax, putting a dent in your earnings. This pitfall is not exclusive to CDs, however.
  • Inflation: Inflation causes another disadvantage. When consumer prices rise, the value of your dollar goes down. If you're investing in a CD, the interest rate may not be high enough to keep pace with inflation. In other words, if inflation rises, the value of your dollar goes down and CD interest rates may struggle to keep up.

Alternatives to CDs

There are a variety of savings alternatives if you decide a CD is not worth it, including:

  • Regular savings accounts: These accounts provide a modest interest rate, often lower than CDs, but in some cases, there are no restrictions on withdrawals. 
  • Online savings accounts: These accounts offer an option to store money without fees or requirements. Many online savings accounts provide better interest rates than regular savings accounts.
  • High-yield savings accounts: These accounts offer higher interest rates than regular savings accounts. Account holders can typically withdraw funds up to six times per monthly statement without penalty.
  • Student savings accounts: Many banks offer student savings accounts to students under 25 years old. These accounts tend to offer higher interest rates and lower fees.
  • Money market accounts: These accounts usually involve a higher minimum balance than a savings account and may require a higher minimum balance to earn interest.
  • Cash management accounts: These accounts are similar to checking accounts but can offer higher interest on your balance.

The bottom line

CDs are a safe investment that can net you a higher return than other low-risk accounts. The key is to make sure you won't need the funds for the CD term, because if you withdraw money before the term ends, you could lose some of your principal and any accrued interest.

Correction, 7:30 a.m. PT Jan. 25: An earlier version of this article suggested that some CDs also have a monthly or annual maintenance fee. CDs charge an early withdrawal penalty fee if you withdraw your funds before the CD's maturity date. The story also said that CD rates are generally higher than a regular savings account but lower than a money market account. In fact, CD rates, generally, are higher than what you'd find on both standard savings and money market accounts. The earlier version of this article also misnamed the full name of the FDIC as the Federal Deposits Insurance Company. The article also previously stated that high-yield savings accounts offer higher interest rates than regular savings accounts or online accounts. Some online accounts offer competitive rates to high-yielding savings accounts. The article also said that many banks offer student savings accounts specifically for those under 20 or 25 years old when it should've said that many banks offer student savings accounts to students under age 25. Finally, the previous article stated that cash management accounts are similar to checking accounts but offer interest on your balance. In fact, these accounts are similar to checking but offer higher interest on your balance.