When do you open a short-term CD instead of keeping your money in a savings account? The main advantage of the CD is the rate lock. You don’t have to worry about the rate going down until the CD matures. The downside with the CD is that you’re locked into the CD until maturity. If you need the money before maturity, you’ll be hit with an early withdrawal penalty. The important question you’ll have to ask is if the CD rate is high enough to make it worthwhile.
Ally Bank’s 11-month No Penalty CD removes most of the downsides of being locked into a CD. Since there’s no penalty, you can close the CD without a penalty anytime from 7 days to 11 months after you open the CD. I wrote about my experience opening and closing this 11-month No Penalty CD in 2011. As I explained in that blog post, this 11-month No Penalty CD makes more sense than most other short-term CDs. There’s another question: does it make more sense the Ally’s savings or money market account?
That question was asked over the weekend by the DA member hary536 in this forum thread:
Just wondering, what do the members here suggest me: Whether I should open AllyBank 11 month no-penalty CD or savings account at this time? CD rate is slightly lower than savings account at this time. Any suggestions?
I only see two advantages of the 11-mo No Penalty CD:
1) Your rate is locked for up to 11 months (less if you choose to close early). The savings account rate may go down. However, it's unlikely to go down significantly. Last year at this time, the savings account rate was 0.84% and the 11mo CD rate was 0.93%. The savings account rate actually went up in the last year before recently falling back to 0.84%. If the future follows the past, the CD will provide little or no interest rate benefit over the savings account.
2) When the 11-mo CD matures, you will likely be offered a 0.25% rate bonus if you choose to renew (you won't receive this if you close the CD early). That will likely give your 11-mo CD a clear rate advantage over the savings account. If this sounds appealing, you may want to use a 3-mo CD first, and when that matures, you can then get a 11-mo CD. Please refer to my Ally Bank's Loyalty Rewards Program review for more details.
I see three important disadvantages of the 11-month CD as compared to the savings account:
1) The rate is currently less than the savings account rate. As of 4/1/2013, the savings account rate is 0.84% and the 11-month CD rate is 0.81%. The savings account rate may fall lower during the 11 months, but as I showed above, it’s unlikely that we’ll see a large drop over 11 months. Let’s say you open the CD with a 0.81% and the savings account rate falls from 0.84% to 0.44% over the 11 months. For the sake of simplicity, let’s say the average savings account rate for 11 months is 0.64%. So the average rate spread between the CD and the savings account would be 0.17% (0.81% - 0.64%). For a $10K balance over 11 months, the difference in interest comes out to be less than $16. So even if the savings account rate declines significantly, you won’t earn much more in the CD.
2) The money in the CD is not quite as liquid as in the savings or money market account. As I described in my Ally No Penalty CD review, it can take a few days to close the CD and receive the funds. It took two business day for me to request a closure and to have access to the funds in my Ally savings account. Readers have mentioned that you may be able to expedite this funds transfer, but it’s not a sure thing. So if you think you may need quick access to your money, the savings or money market account is better. And don’t forget that with the money market account, you can write checks to access your money.
3) If you need only part of the money in your 11-month CD, you will still have to close the entire CD. Ally doesn’t allow for partial withdrawals.
Based on #2 and #3 above, you may want to consider another option. You may want to first open the savings or money market account. Once that’s opened, you can then think about some CDs to increase your interest rates. The Ally savings account makes it easy to fund your Ally CDs, and it makes it easy to receive the funds when the CD matures. And it can also be very useful if you find better CDs at other banks and credit unions.