Are CDs Worth It? Should You Get One Now or Wait?

A CD can be an excellent way to grow your money. Knowing when to put your money into a CD can give you a better return. Here's what to know before you lock your money away for a CD term.
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Written by Shannon Lee
Financial Expert
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Managing Editor
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With the economic upheaval of the last several years fresh in the mind, many consumers are choosing to go with solid investment vehicles that don’t put their money at risk.

Enter the certificate of deposit. A CD can allow you to lock in a good interest rate so that you know exactly what you will earn over a certain period.

As rates have fluctuated wildly these last few years, CDs have become a smart way to take some surprise from the banking experience and ensure you will receive the interest you sign up for.

How a CD Works

A certificate of deposit is a savings option offered by many banks. In credit unions, it’s known as a share certificate. When you sign up for a CD, you agree to put money into an account for a set period, known as a term. Generally, that term can last anywhere from three months to five years, though some banks offer longer terms.

When you put your money into a CD, you agree not to touch that money for the term you agreed upon. Once that term ends, you can remove your money and the interest you earned from the account. However, if you withdraw the money early, you might forfeit all the interest and face penalties.

Because you agree to give up access to your money for a time, the rates on CDs are usually higher than those for similar products, such as money market accounts or savings accounts.

Which Banks Have the Best CD Rates?

Hundreds of banks offer CDs, and there’s fierce competition among them to offer the best rates. We’ve compiled a list of some of the best CD accounts to help you find the ones that best fit your financial goals.

Pros and Cons of CDs

As with any other banking product, figuring out the pros and cons can help you get the best bang for your buck. Here’s why you might want to go with a CD or choose to put your money elsewhere.

Pros

  • Set interest rates. When you open the CD, you lock in your rate. You will know exactly how much you will earn during the CD term. This is an advantage over high-yield savings accounts, where rates can change anytime.
  • Many terms to choose from. Terms range from 3 months to 5 or more years. You select the suitable CDs to meet your long-term and short-term savings goals.
  • FDIC insured. The only risk of losing money with a CD is if you choose to withdraw your funds early and face a penalty. Otherwise, your investment is covered by up to $250,000 per account ($500,000 for a joint account).
  • No fees. Most CDs don’t have fees. The only way you might pay a fee is for an early withdrawal penalty if you choose to end the CD before the term is up.
  • Higher interest (usually). CDs typically offer among the highest interest rates for banking products. You can get higher rates with other investments, but those put your money at risk. Higher and guaranteed interest is why some opt for CDs rather than savings or money market accounts.

Cons

  • Ties up your money. Getting a CD means giving up access to that money for a set period. You won’t be able to withdraw or otherwise use the funds until the maturity date.
  • Early withdrawal fees can be steep. Depending on how much you put into the CD and the bank’s rules for early withdrawal, you might face a penalty that can eat up all the interest you expected to earn.
  • Interest rates are locked in. In many cases, the rates you get for a CD are much higher than what you get for a high-yield savings account. If the interest rates go up after you sign on for the CD, you’re stuck earning the lower rate. This is why some choose to create CD ladders.
  • Beware the automatic reinvestment. Some CDs roll over into a new term when the maturity date comes. If you aren’t on top of things, that 1-year CD could roll right into a 3-year CD, and you can’t do anything to reverse the clock. Set bank alerts on your phone to be notified when the CD term is about to expire.

When Is a CD Worth It?

A CD is worth it when the interest rates are very advantageous, and you have a solid chunk of money to let sit in an account for a set time. Here are some reasons why a CD makes a lot of sense.

Saving for a Particular Purpose

When you have a clear savings goal in mind and need some interest earnings to boost your goals, a CD can help.

If you plan to use the money within the next five years or so, such as for a down payment on a house or an exciting vacation, a CD makes a lot of sense.

You know exactly how much money you are saving, how much interest you are making, and when to expect that money to mature.

Controlling Your Spending

If you find that a savings account leaves you tempted to pull out money whenever you want, a CD can become a safety net to keep you away from the money you want to save.

By putting money into a CD, you know that you will be paying a penalty if you take out even a penny; therefore, you will have much more incentive to “forget” that money is there and won’t be as tempted to touch it before the account matures.

This little push toward self-discipline can lead to better discipline in other areas.

Making Smart Financial Choices

A CD might be a great compromise if you want to make some interest but don’t want to risk putting your money in the stock market.

While it will lock up your money for a time, it will also give you a guaranteed rate of interest, which is something you can’t get from most investments.

Putting your money in a CD is trading possible high dividends for a potentially smaller yet certain return.

When Is a CD Not Worth It?

If you need to keep your funds as liquid as possible and require unfettered access to your money, a CD is not the product for you.

If you think you might pull money from your CD before the term is up, it might be better to put that money away in a high-yield savings account so there are no penalties when you withdraw it.

If you don’t yet have a robust emergency fund, consider contributing to that before choosing a CD. Though a CD can be a great place to sock away extra cash, it’s unsuitable for an emergency fund. Build up your emergency fund first, and then consider whether CDs are worth it for your extra money.

On the other hand, if you are looking for a substantial long-term investment, a CD might not be the best option.

Long-term investments should include stocks, bonds, mutual funds, and other stock market investments.

Talk to a financial advisor to determine your risk tolerance and what investments should be used to grow your money, and use CDs for stability of smaller amounts of money in the lead-up to retirement.

When Does a Savings Account Make More Sense?

If you want access to your funds at all times, a savings account is the best option.

Choose a bank with a robust mobile app for managing your funds from anywhere and a savings account with an ATM card.

These features help ensure you can get access to your money at any time. Choose a savings account with no minimum balance requirement for even better flexibility.

Buy a CD Now or Wait? 

Interest rates are advantageous, making savings a hot topic in the financial sector.

Because the interest rates are sometimes touching historic levels of return, now makes a great time to purchase a CD. Look at the bank’s offers and remember that the highest rates are typically for longer terms or the 18-month CD option.

Why doesn’t it make sense to go with a CD? It might pay to wait if your financial advisor believes you will get a better interest rate by sitting on your money for a bit and letting interest rates rise even more. And as mentioned earlier, if you don’t yet have an emergency fund, do that first.

You need a good amount of liquid cash to handle emergencies that might come your way before a CD has the chance to mature.

Strategies for Getting the Most From Your CD

A solid savings strategy for CDs is known as laddering. Laddering happens when you put money into CDs of varying lengths, such as one-year, two-year, and five-year terms.

This allows you to take advantage of the higher rates listed for longer terms while allowing you smaller amounts that you can access at regular intervals. For instance, you can pull the one-year option after 12 months; when you do that, you can decide if you want to use the money or roll it into another one-year CD. In the meantime, your other CDs are at a higher rate and gaining more interest as time goes on.

The only problem with CD laddering is that sometimes, interest rates will go up when your money is locked in and might go higher than what your current CD is paying you in interest.

That’s another good reason for laddering. Though you might not want to pull the five-year CD even with lackluster interest rates, you can easily choose to renew the one-year CD at a higher rate when it matures.

No-penalty CDs and bump-up CDs are also good options. The no-penalty CD takes away the withdrawal penalty.

Though the interest rates aren’t as high as with a typical CD, you can withdraw your money anytime or roll it into a higher-paying CD. Most no-penalty CDs are for one-year terms.

A bump-up CD allows you to request a rate increase on your CD during the term, but this depends upon your bank. Banks often have unique rules for bump-up CDs, so be sure to request all the details from your particular bank before you choose to use a bump-up CD.

About Author
Shannon Lee
Shannon Lee, a versatile contributor to MoneyRates, is a freelance writer with a passion that spans over two decades. Her extensive writing portfolio encompasses a myriad of topics, ranging from personal finance and home improvement to education, relationships, and medical and health subjects. In addition to her prolific freelance career, Shannon is also a novelist. Shannon’s dedication to providing insightful and informative content makes her a valued voice in the world of personal finance.