When Should You Get a CD?

A certificate of deposit can be a great savings option if its interest rate is higher than what other accounts pay, but a CD isn’t always the right place for your cash.

Written by Derek Silva / April 29, 2022

Quick Bites

  • A CD—short for certificate of deposit—is a bank account that offers you a guaranteed interest rate in exchange for you agreeing not to withdraw your money for a certain number of months or years.
  • Opening a CD can be a good option if you find a high interest rate and won’t need that money before the CD matures.
  • When overall interest rates are relatively low, you may be better off in a high-yield savings account.
  • For savings that you may need to tap immediately in an emergency, you’re better off not locking up the money in a CD.
  • Depending on your situation and goals, good alternatives to CDs could include high-yield savings accounts, U.S. Treasury bonds or even stocks.

CDs have historically been a useful savings tool because they pay a guaranteed interest rate—calculated as an annual percentage yield, or APY—and their rates are usually higher than what standard bank savings accounts pay. In exchange, you can’t touch your money for months or years, or you’ll face an early withdrawal penalty if you do.

In times when interest rates are low overall, however, or when you have more pressing long-term financial needs, such as saving for retirement, even the relatively high interest a CD pays may not be worth it.

These are the main considerations you should make when deciding whether or not a CD is right for you.

Inside this article

  1. What is a CD?
  2. When you should use a CD
  3. 4 reasons you shouldn’t use a CD
  4. CD alternatives

What is a CD?

A certificate of deposit (CD) is a kind of bank account that usually pays a higher interest rate than standard savings accounts do, but in exchange you agree not to withdraw your money for a certain period of time. The length of the CD, known as its term, typically ranges from three months to five years, though shorter- and longer-term CD terms do exist. Once a CD reaches maturity—that is, the end of its term—you can collect your money as well as the interest you earned.

Withdrawing money before your CD reaches maturity usually triggers a penalty. Early withdrawal penalties vary by bank, but you might have to give up a few months worth of interest or a percentage of the money you initially deposited in the CD.

When you should use a CD

In general, CDs can be a good option for your short-term savings because they pay higher interest rates than normal savings accounts, especially if you can choose a CD that will take years to mature. CD interest rates are also predictable. The interest rates on a savings or checking account could change at any time, whereas CD rates are locked in for the entire term.

4 reasons you shouldn’t use a CD

A CD may offer an above-average interest rate, but that doesn’t necessarily mean it’s the best option. Here are four situations when a CD may not be worth it:

  • Interest rates are very low overall

  • The CD requires a high minimum deposit

  • You’ll need your money before the CD matures

  • It doesn’t fit with your financial goals

Interest rates are very low overall

When interest rates are very low, as they currently are, the rates on CDs tend not to be much higher than what savings accounts pay. As of April 2022, the average interest rate for a bank savings account is 0.06%, while the average interest rate for a 12-month CD is 0.17%.[1]

While that CD rate is more than twice as high as what the average savings account pays, it’s still very low historically. Plus, as interest rates rise, you could miss out on a higher rate because you locked up your money in a CD. Today’s low CD rate is also not going to earn you much in the long run because it’s lower than the rate of inflation, which has mostly ranged from 1% to 3% in the past 20 years.[2]

Shop around for higher savings account rates from online banks, but also think about other types of investments (as discussed later) that may offer higher long-term gains when interest rates are very low.

The CD requires a high minimum deposit

Minimum deposit requirements vary by institution but could range from a couple hundred dollars to more than $1,000. There are banks with low or no minimums, especially online banks, but opening a CD through your primary bank may require more money than you have on hand.

You’ll need your money before the CD matures

If you’ll need your money before the end of the CD term, you probably don’t want to use a CD. Most CDs have a minimum term length of three months, and you’d likely need at least a 12-month CD to earn more interest than you could get from a high-yield savings account.

Withdrawing your money before a CD reaches maturity may not be possible, and, even if it is, you’ll have to pay an early withdrawal penalty. (On the bright side, if you do incur an early withdrawal penalty, you can deduct the penalty amount on your federal tax return.)

It doesn’t fit with your financial goals

Make sure to also factor in all your financial goals before opening a CD. Do you have an emergency fund? If not, then you may want to put money into an easily accessible savings account that you can tap in case of emergencies, like the loss of your job or unexpected medical expenses.

Have you been saving for retirement? If so, you should invest your retirement accounts in a diversified portfolio that gives you a better chance of seeing your money grow, not just leave that long-term savings in a CD.

CD alternatives

There are many other ways to build your savings and wealth, but it’s important to consider how much money you have and when you’ll need access to your money. If you’ll need the money in the near future, a high-yield savings account may be the best option. For near-term goals, bonds may be appropriate. For long-term savings goals, like a retirement that might be decades away, stocks, bonds and other investments may be the right option.

High-yield savings accounts

If you’ll need access to your savings in the next year, you may want to look for a high-yield savings or checking account. These accounts are more liquid—meaning you can easily withdraw from them or add money. And some online banks offer higher interest rates than what a CD from a traditional bank pays. Money-market accounts can also offer high interest rates, though they usually require you to make a larger initial deposit or maintain a higher account balance.

Bonds

If you won’t need access to your money in the next year, consider buying a savings bond from the U.S. Treasury. For example, in April 2022 Series I Savings Bonds (the “I” is short for inflation) are paying an interest rate of 7.12%. You can hold onto a Series I Savings Bond for up to 30 years, but you can’t cash it in for at least one year. Withdrawing within the first five years will result in losing three months of interest, so this is best as a medium-term savings option. You can buy a Series I Savings Bond online if you create an account at TreasuryDirect.gov, and they’re available for any amount greater than $25.[3]

Investment alternatives

For building wealth over the long term, you may want to invest in the stock market as well bonds and cash. All investing comes with a certain amount of risk, so buying stocks isn’t the best option if you’ll need your money soon and therefore can’t afford to lose any of it.

Still, over the long run, you can earn strong returns with stocks. The average annual return for the S&P 500 over the past 90 years is 12.1%. During that time, stocks have recorded gains and losses of more than 40%.[4] So make sure you have enough liquid savings to weather market downturns, and only buy stocks as part of a diversified portfolio that’s appropriate for your time horizon and risk tolerance.

There are other types of investments you can make aside from stocks, but they may require specialized knowledge or more time and money than you can afford.

Gold

This is a classic investment class, but the price of gold is quite volatile and currently near historic highs.[5]

Alternative investments

Investments like cryptocurrencies and NFTs are popular today, but their prices are also volatile, and they aren’t always easy for first-time investors to handle.

Real estate

You may also wonder about investing in real estate, though home prices are also high today. Instead of buying actual property, you can invest in real estate via a REIT, which is short for real estate investment trust.

Article Sources
  1. “National Rates and Rate Caps,” FDIC, https://www.fdic.gov/resources/bankers/national-rates/index.html.
  2. “Inflation, Consumer Prices for the United States,” Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/FPCPITOTLZGUSA.
  3. “Buying Series I Savings Bonds,” TreasuryDirect, https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm.
  4. “Historical Returns on Stocks, Bonds and Bills: 1928-2021,” New York University Stern School of Business, https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.
  5. “Gold Spot Price,” APMEX, https://www.apmex.com/gold-price.

About the Author

Derek Silva

Derek Silva

Derek is a writer and editor who has spent years covering taxes, estate planning, and other personal finance topics. Derek has previously worked for SmartAsset and Policygenius, with his work being covered by Yahoo Finance, MSN, Business Insider, and CNBC, among others.

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