Are CDs worth it?

When it comes to saving money, there are several strategies to choose from, each with benefits and potential drawbacks. One popular choice is a certificate of deposit, or CD. CDs can be a good option for most savers, particularly in a high interest rate environment.

Determining whether CDs are worth it for you depends on several factors. These include: 

• Your financial goals

• Your timelines for your savings goals

• Your personal savings preferences

Plus, you’ll need to consider outside factors like the current interest rate. 

By understanding what CDs are, you can make an informed decision about whether they align with your financial goals. If you’re asking yourself, “Are CDs worth it?” here’s what you need to know.

Certificates of deposit are secure medium- to long-term savings accounts that many banks and financial institutions offer. When you open a CD, you agree to leave your money in the account for a set period. CDs offer a guaranteed return with a fixed interest rate in exchange for committing your funds for this set period. 

Other savings tools, like savings accounts, have variable rates that can change over time. CDs may offer higher rates of return than these types of savings tools. Opening a 360 CD lets you lock in a rate that’s above the national average, ensuring your savings grow steadily over time. And compared to investments that can rise and fall in value, a CD offers more predictable returns with very low risk.

CDs differ from savings accounts, checking accounts and money market accounts in a couple ways:

• Funds in CDs must remain in the account for a set period unlike other accounts that allow ongoing access. If you need the funds in a CD before its maturity date, i.e. the end date of the investment, you may pay a penalty for early withdrawal.

• Unlike traditional checking or savings accounts, you can’t add money to an existing CD account once it has been funded. You can, however, open a new CD to invest additional funds.

Like any investment, CDs have pros and cons to consider. Here are some of the main advantages of CDs:

• Security: CDs are insured by the Federal Deposit Insurance Corporations, if the bank is an FDIC member. FDIC insurance protects up to $250,000 per depositor, per insured bank, per deposit ownership category. This means your money is safe—even if the bank holding the CD fails.

• Higher interest rates: CDs typically offer higher interest rates than savings accounts.

• Predictability: When you open a CD, you know exactly how much interest you’ll earn during its lifespan and when you can access your money. Stocks, mutual funds and even bonds can be much harder to predict.   

• Flexible time spans: CDs are available in a range of terms, from a few months to several years. This lets you choose the one that best fits your financial planning needs.

CDs also have some tradeoffs to be aware of:

• Reduced access to funds: Once you put money into a CD, you won’t be able to access it until it matures–that is, unless you’re willing to pay a penalty for early withdrawal. Try lining your CD timelines up with goals. For example: open a several-month CD ahead of a vacation and a multiple-year CD when saving for a home. 

• Potential opportunity loss: CDs usually offer higher interest rates than savings accounts, but they might not have the return potential of other investments like stocks or corporate bonds. Of course, they also have less risk. Combining CDs with other assets may be a good way to diversify your portfolio and spread out your risk. 

• Reinvestment risk: If you choose a longer-term CD and interest rates rise, you could miss out on higher yields. On the other hand, if you choose a shorter-term CD and interest rates fall, you might see lower renewal rates on CDs compared to what you were earning. Consider dividing your funds via a CD ladder strategy (more about this below). This would allow you to take advantage of different rates while also providing occasional access to some of your cash.

When trying to decide, “Are CDs worth it?” there are a few key factors to keep in mind:

The interest rate environment is among the most important factors when considering opening a CD. In many cases, the longer the term of the CD, the higher the interest rate. But rates on CDs follow the general interest rate environment. 

If interest rates rise? CD rates will likely follow. If interest rates fall? Longer-term CDs might have lower rates.

Banks may offer higher promotional rates on shorter-term CDs as well as special rates for new customers. In some cases, a higher minimum deposit may be required to access the best rates. As with any financial decision, be sure to compare options to find the best deal.

Inflation is the rate at which everyday prices rise. If prices rise faster than the interest your CD earns, your money may not stretch as far by the time the CD matures.

Say a five-year CD earns 4% interest, but annual inflation rises to 5%. The real value of your money will decrease 1% over the years that your funds are in a CD. Consider the current and projected inflation rates when deciding whether to purchase a CD (especially a longer-term one).

CDs are meant to be kept until they mature. Most banks charge a penalty if you withdraw your money before the term ends. The penalty can reduce or even erase the interest you’ve earned. Before opening a CD, make sure you understand the terms and don’t expect to need the money before it matures.

What if you need to withdraw the money before the end of the CD’s term? Consider a shorter-term CD or a savings account, which lets you access your money more easily.

Many banks provide a choice to withdraw the interest earned on a CD or reinvest it back into another CD.

Still asking yourself, “Are CDs worth it?” Here are a few more tips to help you make the most of your money:

CDs can be a good choice if you have a specific financial goal: say, saving for a down payment on a house or a child’s education. By making the term of your CD match your goal timeline, you can make sure your money will be there when you need it.

CDs are considered low risk. Why? They offer a guaranteed return and are usually FDIC insured. Michelle Schroeder-Gardner, founder of a financial blog, says that if you have a low risk tolerance, or are retired or nearing retirement, CDs can be a good choice to save your money while still earning some interest.

Interest rates affect how useful a CD can be. When rates are low, a CD may not earn much more than a regular savings account. But when rates are rising, locking in a fixed rate with a CD can be a smart move.

The CD ladder strategy involves purchasing multiple CDs with different maturity dates. For example, you might open CDs maturing in 6 months, 12 months and 36 months. After the first CD matures, you can decide whether to renew or withdraw. 

The ladder approach allows you to take advantage of higher interest rates typically associated with longer-term CDs while still having access to some of your money. By spacing out maturity dates, you can also reinvest a portion of your money at potentially higher rates as each CD matures.

Before opening a CD account, compare rates, terms and conditions to find the best deal. Make sure you understand all the details of the account. These include minimum opening deposit requirements, early withdrawal penalties and any fees associated with the account.

So, are CDs worth it? They can be a good choice for those looking for a low-risk, predictable way to save money. Some things to consider:

• CDs can be a smart savings tool if you want predictable returns and don’t need immediate access to your money. 

• Compare your options before opening a CD. Interest rates, CD terms and early withdrawal penalties can all affect whether it’s the right fit. 

• Match your CD strategy to your savings goals. Choosing the right term can help you earn more while staying on track with your savings goals.

“You may want to put money in a CD when you have a lump sum that you don’t need immediate access to,” Schroeder-Gardner says. She also says that CDs might be a great tool for retirees to make extra risk-free income. “Younger people who have more time to invest might prefer stocks or bonds, which can have higher returns and be easier to access.”

Now that you know the benefits and drawbacks of a CD, consider opening a Capital One 360 CD account.