Ais a type of savings account in which you have to deposit money for a fixed period. In return, the bank or credit union pays you interest — often higher than the rate you’re paying or savings account. The longer you agree to leave the money in the account, the higher the interest yield.
But are CDs worth it?
“It depends on the individual’s situation and goals,” said Robert Donnelly, CFO of Marketplace Fairness. Generally speaking, CDs have some key advantages that may make them worth considering for some people.
You can easily check today’s CD interest rate to see if it makes sense for you, or use the table below to explore some local options.
Is the CD worth it?
CDs provide a low-risk way to earn as you save. Here’s a closer look at the three key benefits they offer.
1. CDs are less risky
A major advantage that comes with CDs is that they present little to no risk to the account holder.
Banks offer fixed interest rates so that you get a guaranteed amount if you keep your money in the account for an agreed period. For example, if a one-year CD offers a 4% annual percentage yield (APY) and you deposit $5,000, you’ll earn $200.
“Investors know how much money they will earn on their investments, which can be helpful for budgeting and planning purposes,” says Donnelly.
Additionally, as long as you purchase a CD from an institution insured by the FDIC or NCUA, your account is protected in the event of a bank failure (up to the amount allowed).
2. CDs earn more interest than bank accounts
Another advantage of CDs is that they offer higher returns than checking or savings accounts. According to FDIC, the average national deposit interest rate for checking accounts as of March 8, 2023 was 0.06%. A savings account was 0.35% but a CD came in at 0.18% to 1.26%, depending on the term you selected.
While these are national averages, you may find much higher interest rates when shopping around. For example, Capital One is currently offering an 11-month special CD with 5.00% APY and no minimum deposit. The bank’s usual CD rates are also considerably higher, ranging from 3.30% to 4.10% APY.
In comparison, Capital One’sOffers a 3.40% APY. In this case, CDs offer higher returns as long as you agree to a tenure of at least 11 months. So be sure to shop before opening the CD. You can easily explore your CD options here or use the table below to get started
3. CD offers several options
Banks and credit unions offer a lineup of CD terms, typically from one month to five years or longer. As a result, you can choose words that best suit your situation and goals.
“For example, if you know you’re buying a house in two years and the down payment is estimated to be $40,000, you don’t want to risk that money in the stock or bond markets,” says Dave Carey, CFA and founder of Wealthtrace.
He adds “Instead, you can buy a two-year CD with a fixed rate based on interest rates during that period. At the end of the two years, you’ll have access to the interest money earned.”
You may consider implementing a CD ladder strategy. With a traditional CD ladder, you divide your investment between five CDs with maturities ranging from one year to five years. Then, as your CDs mature each year, you reinvest the funds you don’t need into the five-year CD. Soon, you will have five CDs with tenors of five years and one maturing every year
While CDs can be great in some situations, there are a few potential pitfalls to consider.
“One drawback is that you may be charged a fee if you withdraw your money before the end of the term. Additionally, if the interest rate rises during the term of your CD, you won’t be able to benefit from that higher rate unless you cash out and get a new one. Reinvest at a rate (which may incur additional fees), says James Allen, CPA and founder of Billpin.
It is also important to consider opportunity costs. Can you earn or save more elsewhere? Although CDs often have higher APYs than interest-yielding bank accounts, they typically have lower returns than other investment options such as stocks. Additionally, if you have high-interest debt, it may be more beneficial to use your funds to pay it off first. You need to weigh the risks and benefits to decide which route is best for you.
Is a CD worth it right now?
. With interest rates rising, . But it really comes down to your risk tolerance and budget needs.
“Generally speaking, CDs are a good idea if you’re looking for a safe place to invest your money and don’t mind holding onto it for a period of time. However, there can be pitfalls – so be sure to do your research before investing in one,” Allen said.
Ready to start? You can check your local CD offers online now or use the table below