Are CDs Worth It?

Certificates of deposit (CDs) are a common savings tool that typically offer higher interest rates than traditional savings accounts, helping your money grow faster. But are CDs worth it? The answer depends on several factors, including the interest rate environment and your financial goals.

Here’s what to consider when deciding if a CD is right for you.

Are CD accounts worth it?

CDs can be a smart choice for many savers, thanks to two key advantages they offer: security and, typically, fixed rates. When you open a CD at a bank with FDIC insurance (or NCUA insurance, if it’s a credit union), you can have peace of mind knowing that your money is protected. Both the Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Administration (NCUA) insure up to $250,000 per depositor.

Fixed rates are a unique benefit of CDs. Unlike traditional savings accounts, which typically have variable interest rates that fluctuate over time, CDs generally earn a guaranteed rate for the duration of the CD term.

That means whether you have a 12-month CD or a 36-month CD, your rate won’t change. Having a predictable return makes it easier to plan and ensure you are on track to achieve your savings goals.

Additionally, some savers like locking up a portion of their money for a set period so they aren’t tempted to spend it on unnecessary purchases.

What affects CD rates?

CD rates are closely tied to changes in the federal funds rate, which is set by the Federal Reserve and influences the interest rates that banks offer on deposit accounts, including CDs.

In recent years, the Federal Reserve raised the federal funds rate to combat inflation. However, now that inflation has slightly cooled, the Federal Reserve has started making rate cuts. As a result, CD rates have started dropping.

Generally speaking, when the federal funds rate is higher, banks offer higher rates on CDs, allowing you to earn more on your savings. The opposite is also true: When the federal funds rate is lower, CD rates tend to fall, decreasing your earnings.

What are the pros and cons of CDs?

As with most financial products, CDs have both pros and cons to consider:

When should you get a CD?

Here are a couple of situations where you may consider opening a CD:

Rates are falling

It can be a wise move to invest in a CD when interest rates are falling, as it allows you to lock in a higher rate for your entire term. For example, if you secure a CD with a 5.00% annual percentage yield (APY) and rates drop to 4.50% APY for new CDs, you’ll continue to earn the 5.00% APY until your term ends.

You want to achieve a specific financial goal

It can be helpful to use CDs when saving for specific goals, such as a down payment on a new home or vehicle, a family vacation or other goals with a clear timeline. For instance, let’s say you want to buy a new car in one year; a 12-month CD could keep your savings safe while earning you some interest to put toward the down payment.

CD alternatives

Instead of a CD, some other options you can consider include:

• High-yield savings account: Opening a high-yield savings account can help you earn a competitive rate on your savings — while still being able to access your money as needed. Unlike CDs, there are no early withdrawal penalties for taking money out of high-yield savings accounts, although some banks have monthly withdrawal limits. These accounts are typically offered by online banks, making them a good fit for people who are comfortable doing most, if not all, of their banking online or through a mobile app.
• Regular savings account: You can also stash your money in a standard savings account. These accounts are typically offered by traditional brick-and-mortar banks and credit unions, and they generally have lower rates than high-yield savings accounts and CDs. Savings accounts may be a good fit if you prefer having in-person customer service and banking services.
• Money market account: Money market accounts offer the best of both worlds if you want an option that allows you to save and spend. These accounts combine features of checking and savings accounts, as they typically come with debit cards and check-writing privileges while earning interest. However, money market rates tend to be lower than CD rates.

Frequently asked questions

When is a CD not worth it?

You may want to rethink opening a CD if you’ll need the money before the term ends, as early withdrawal penalties can eat into your earnings. Additionally, if you’re saving for long-term goals, such as retirement, relying solely on CDs may not provide enough growth to meet your goal.

How much does a $10,000 CD make in a year?

It depends on your APY and term. Let’s say you save $10,000 in a 12-month CD with a 5.00% APY. At the end of the 12 months (assuming you didn’t take any early withdrawals), your account balance will be $10,500, meaning your CD made $500 in interest.

Can you lose money in a CD?

CDs are generally considered to be one of the safest places to park your savings. Typically, the only way to lose money in a CD is by taking money out of the account before the maturity date. This can result in an early withdrawal penalty, which can diminish your earnings and even reduce your principal in some cases.

Are CD rates going up or down?

In response to rate cuts made by the Federal Reserve, CD rates are currently going down, and they are expected to continue their downward trend into 2025. If you decide a CD is right for you and have the funds available, it might be a good time to get a CD before rates fall further.

Are CDs a good investment?

CDs are generally considered good investments for people seeking safety and guaranteed returns. However, it depends on an individual’s specific goals and risk tolerance. For example, someone with a more aggressive risk tolerance may choose to put their savings into investments with higher growth potential (but also higher risk), such as stocks.