The Pros and Cons of CDs

Certificate of deposit advantages and disadvantages.

Once you’ve built up your savings, you may start looking for new ways to invest your extra cash—something just as safe as your savings account but with a little more upside. When this happens, you’ll likely come across CDs.

And for good reason: CDs are a predictable and secure way to invest your money. But there are a few things to consider before opening a CD account. To figure out whether CDs are for you, check out the pros and cons of certificates of deposit before investing in them.

The pros of CDs

There are plenty of certificate of deposit advantages, mostly around security and predictability. They include:

  • A fixed interest rate. When you open a CD, you decide exactly how much you want to invest and how long to invest. (Many banks allow you to open a CD account online.) In exchange, you receive a fixed interest rate.

  • Higher returns. Those average rates are higher than you’ll receive in a traditional savings account, which are usually less than 1%.

  • Predictable returns. Unlike other investments, CDs are more certain. There’s no question of how it will perform or how long you’ll keep it. You’ll invest a specific amount at a locked rate for a specific amount of time—say $10,000 at 2.25% for 1 year. And you know exactly how much you’ll have at the end of that year: $10,225.

  • Interest options. Often people assume the interest earned on a CD can only be collected once it fully matures. However, many banks allow customers to choose to receive the earned interest more often—either monthly or annually. If you choose monthly, each month you’re paid the interest and can choose to reinvest it in the CD account to earn even more interest or send the paid interest into a different account with no penalty.

  • Ladder options. A CD ladder is an investing strategy in which customers invest in CDs of increasing lengths—1 year, 2 years, etc. This lets investors tap into their money along the way while keeping some of it invested for a longer period.

  • Security. One of the biggest certificate of deposit benefits is security. Like checking and savings accounts, CD accounts are insured by the Federal Deposit Insurance Corporation, up to the allowable limits.1

  • Account access. Depending on your bank and account’s products terms, you may be able to withdraw your money from a CD—though as you’ll see in the cons section, taking cash from a CD early may have a penalty associated with it.

The cons of CDs

There are some certificate of deposit disadvantages. They include:

  • Less flexibility. With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you can’t withdraw the money whenever you want—at least not without paying a penalty. Most banks charge you some of your accrued interest, and maybe even part of your original investment, if you decide to withdraw early. And those penalties usually mean a loss of interest or even a loss of your original investment.

  • Inflation. The other disadvantage is that CD interest rates can sometimes struggle to keep up with inflation.2 When inflation rises, the value of your dollar goes down. So if you invest $1,000 in a 1-year CD with a 1.5% interest rate, and inflation rises 1.9% in that same year, your money will be less valuable at the end of the year. In that case, you might be better off keeping your money in a more flexible savings account with a high interest rate or looking for an investment that at least has a chance of performing better than a CD.

Are CDs for you? If you’ve built up your savings and are looking to earn a little more for your efforts, they might be. When it comes to investing in CD accounts, the pros and cons all come down to predictability and flexibility. Only you will be able to find the balance between the two that works best for your financial situation.


This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

Citations

  1. “What Is a Certificate of Deposit?” investors.gov (n.d.). Retrieved June 7, 2018, from: https://www.investor.gov/introduction-investing/basics/investment-products/certificates-deposit-cds

  2. “Insured or Not Insured,” FDIC.gov (January 31, 2018). Retrieved June 7, 2018, from: https://www.fdic.gov/deposit/covered/notinsured.html

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