Are CDs Worth It?

Certificates of deposit (CDs) are worth it if you want a guaranteed return over a specific period of time. Investing in a CD is also advantageous when the annual percentage yield (APY) outpaces inflation or interest rates are falling.

If your money grows faster than inflation, its real value increases. Furthermore, when interest rates are expected to fall, locking in a higher rate with a CD can be beneficial because other investments may offer lower returns.

Interest rates are expected to fall in 2024. Depositing money into a CD by the end of 2023 could lock in a better yield compared to other investments that may offer a lower return in the future.

 

CD Pros and Cons

CD Pros

Predictable Returns

CDs typically offer fixed interest rates, ensuring a predictable return that’s usually higher than a traditional savings account’s yield.

Government-Backed Insurance

CDs are a safe investment option because the funds are usually insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).

Diverse Term Options

CDs offer a range of term lengths, from as short as a few months to several years, allowing investors to select a timeframe that best fits their financial needs.

Additionally, there is a wide range of CD features that can support your savings goals. For example, you might be able to get an increase in interest during your term, no penalties for early withdrawal, or the chance to stash your funds in a tax-advantaged retirement account. You can learn more about the different types of CDs here at WalletHub.

No Monthly Fees

Most CDs do not have monthly fees, which means more of your money earns interest over time compared to traditional savings accounts.

CD Cons

Withdrawal Penalties

With standard CDs, you commit to investing your money for a specific amount of time, and early withdrawals typically result in penalties. A withdrawal penalty is usually a number of days of interest earnings. For example, you may have to pay back 90 - 365 days’ worth of interest, depending on the length of the CD and when you withdraw the money.

Opportunity Costs

In a rising interest rate environment, funds already committed to an existing CD forgo higher yields. In other words, you can’t invest the money elsewhere to earn a higher return, so you miss out.

Inflation Risk

The fixed returns from a CD may not keep pace with inflation, potentially eroding the value of your investment over time.

Potentially Low Returns

CDs generally offer a lower potential return than riskier investments such as stocks or bonds.

When Are CDs a Good Investment?

CDs are best suited for scenarios in which capital preservation is more important than earning the highest possible return. A CD will grow your money but at a modest rate.

1. You have a savings goal with a specific timeline: When you have a clear financial goal with a set date, a CD can ensure your money earns interest risk-free and is available when needed.
2. Your risk tolerance is low: For those who want to avoid the volatility of riskier investments, like stocks, mutual funds, exchange-traded funds, corporate bonds, or real estate, CDs offer a stable option with a guaranteed return.
3. Interest rates are falling: Depositing money in a CD can lock in a higher yield if rates are expected to fall in the future.

Worthwhile CDs to Consider in 2025

You can compare CD rates here at WalletHub to find the right fit for your situation.

Worthwhile CD Strategies

While CDs traditionally restrict liquidity, some strategies can blend the benefits of higher interest rates with flexible access to your money.

Build a CD Ladder

You can build a CD ladder by opening multiple CDs with varying maturity dates. You get regular access to your cash as each CD matures while still benefiting from the higher yield of long-term certificates.

For example, if you have $20,000 to build your ladder, you could split the funds into four CDs maturing over five years.

CD 1: $5,000 with a 12-month maturity date

CD 2: $5,000 with a 24-month maturity date

CD 3: $5,000 with a 36-month maturity date

CD 4: $5,000 with a 48-month maturity date

When the CDs mature, you have options. You can keep your cash, invest in more lucrative opportunities, or continue building the ladder and deposit the money into a longer-term CD.

Purchase Short-Term and Long-Term CDs

A CD barbell is a strategy in which you invest in a mix of short-term and long-term CDs. The goal is to balance the liquidity of short-term CDs with the higher returns of long-term CDs, which is beneficial in a changing interest rate environment.

Buy CDs with the Same Maturity Date

If you anticipate a future need for a lump sum of money, you can purchase multiple CDs with the same maturity date, also known as the bullet strategy. All the CDs are purchased with the same maturity date so that the entire investment becomes available at once.

Open a No-Penalty CD

Some financial institutions offer CDs that allow you to withdraw your money before the term ends without paying a penalty. Because of this added benefit, no-penalty CDs tend to offer lower yields than standard CDs.

Maximize FDIC Insurance

If you have a significant sum to invest and it exceeds the FDIC insurance limit at one bank, $250,000, spreading it across multiple CDs at different banks or other investment options is a better choice.

When Are CDs Not Worth It?

1. Interest rates are low: When interest rates are low, the return on CDs may not be in line with or exceed the pace of inflation, lowering your purchasing power.
2. You need liquidity: If there's a chance you'll need to access your funds before a CD matures, the penalties for early withdrawal could negate any interest you earn.
3. Other investment options offer more yield: When the stock or bond markets perform well, depositing money into a low-yielding CD can mean missing out on potentially higher returns elsewhere.
4. Interest rates are expected to rise: If interest rates rise, investing in a long-term CD at a lower rate can mean losing out on better returns.
5. You want to minimize taxes: Interest from CDs is taxable. Municipal bonds, tax-exempt mutual funds, or tax-exempt exchange-traded funds could be more profitable.

Alternatives to CDs

High-Yield Savings Accounts: Often offered by online banks, these accounts provide competitive interest rates, and you can withdraw your money without penalties.

Money Market Accounts (MMAs): Money market accounts combine the features of checking and savings accounts. They typically offer checks and debit cards and also earn interest. MMAs may have higher minimum balance requirements than traditional savings accounts.

Treasury Securities: U.S. Treasury bills, notes, and bonds are backed by the full faith and credit of the government. They can be a safe way to earn interest.

Short-Term Bond Funds: These are mutual funds that invest in short-duration bonds. They may offer a higher yield than CDs but come with more risk.

Roth IRAs: While generally considered a retirement account, a Roth IRA can also act as a short-term savings vehicle. You can withdraw contributions, but not earnings, without paying penalties or taxes. If you do withdraw earnings, you can avoid potential taxes or penalties by redepositing the funds within 60 days.

Fixed Annuities: Fixed annuities are contracts with insurance companies that promise to pay a set interest rate for a specific period, similar to a CD. Note, they can have more restrictive terms.

Corporate Bonds: Corporate bonds are debt securities issued by companies. They generally have higher yields than government bonds. However, the principal is subject to price changes, which fluctuate based on company performance and market conditions. Corporate bond prices primarily reflect the risk of the specific security.

Municipal Bonds: Issued by local or state governments, municipal bonds can offer tax-free interest, making them attractive to investors in higher tax brackets.