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High Inflation and Low Rates - When Bank CDs Make Sense for Savers

An important concern with long-term CDs is having your money locked into a low-rate CD when interest rates are increasing rapidly. With the possibility that we are moving into a period of rising inflation, that is a growing concern. DA reader kcfield made several good points in this DA Forum thread for savers to consider in today’s low-rate environment. As kcfield asked: “Should we give up our 0.50% interest savings account to invest in a 1% long term CD?” I think many savers and investors would agree with this opinion from kcfield:

In my view, giving up liquidity for such paltry gain is generally not a wise decision. During this time of such low interest rates, there are several options with better returns: paying down debt, making necessary major purchases, investing in the stock market, etc.

Liquid bank account alternatives to CDs

For money that you want to keep completely safe (like for an emergency fund, short-term goal or near-term expense), an FDIC- or NCUA-insured account is a reasonable option. There are federally insured liquid options that can be a good alternative to CDs. These include:

  • High yield savings and money market accounts from online banks and credit unions
  • High yield liquid accounts (savings, money market or checking) from fintechs that partner with banks
  • High yield reward checking accounts from banks, credit unions and fintechs that partner with banks

You can review the top liquid accounts from my bi-weekly liquid summary, and in DA tables of the top savings accounts, money market accounts, checking accounts and reward checking accounts.

I Bond alternative to CDs

For a small balance, there’s also the Series I Savings Bond (I Bond) that is a useful alternative to bank CDs when rising inflation is a risk. An I Bond purchased today from TreasuryDirect will at least keep up with inflation. Plus, it’s exempt from local and state taxes, and you can defer paying federal income tax until it is redeemed or until it reaches its 30-year maturity date. An important liquidity downside is that you can’t redeem it during the first year. Also, there’s a 3-month interest penalty if redeemed during the first five years. The I Bond option won’t help you for a large amount of savings. You are limited to a maximum purchase of $10k per calendar year for an individual (an additional $5k can be purchased via your federal tax refund). For more details on I Bonds, please refer to my latest I Bond review.

Risk that rates stay low for years

Savings, money market and checking accounts may have liquidity, but there is a risk that rates will stay low for years. Since I’ve been writing this blog for the last 16 years, there have always been concerns about being locked into a low-rate CD and missing out on higher rates. Most of the time, those expectations about higher rates in the future did not pan out, and savers earned more by locking into long-term CDs. Of course, the future may look much different than the past. However, the odds that rates may rise in the next few years may not be as high as you think. You may want to hedge your bets by not giving up on CDs.

Hidden CD risks

If rates stay low for the next several years, long-term CDs will likely allow you to earn more than what you could earn from savings and money market accounts. What happens if inflation keeps rising and that forces deposit rates to also rise? If the CD has a mild early withdrawal penalty (EWP), it should be easy for the depositor to do an early closure of the CD, take the penalty and reinvest the money into accounts with the new higher yields. There are two potential gotchas to this approach that we've discussed many times in the last 13 years:

  1. The bank refuses to allow an early withdrawal
  2. The bank increases the early withdrawal penalty on your existing CD

I consider the first risk to be the more worrisome. The increase of an early withdrawal penalty is possible as we learned with the Fort Knox FCU case. It should be noted that in the last 16 years the vast majority of banks and credit unions have honored their EWPs until maturity. In the rare case that the institution decides to not honor the EWP, an institution is required by regulations to provide affected members with a written change-in-terms notice at least 30 days before the effective date of the change. At least that gives us a chance to deal with the changes. If the institution is making a big increase in the penalty, customers should be able to close the CD before this change takes effect with the original early withdrawal penalty.

The risk that a bank refuses to allow an early withdrawal is more worrisome since it totally locks the depositor into the CD until maturity. There have been cases of banks refusing an early withdrawal. In my 2008 blog post, I reported on the experience of Chris at Jumbo CD Investments. He remembered two cases in which a bank refused to release funds. In one case, the bank ended up working with him and his client. They were able to have the bank release the funds after negotiating a higher penalty. The other bank would not budge, and it refused to release the funds.

If rates start rising substantially, banks and credit unions will have more incentives to refuse early withdrawal requests.

Minimizing the risks of CDs

If you are concerned with being locked into a CD, it makes sense to avoid banks and credit unions which include in their disclosures a clause that gives them the right to refuse an early withdrawal. Unfortunately, some banks and credit unions do have clauses in their disclosures which give them the right to refuse an early withdrawal. Some common clauses that I've seen include language like "only with the consent of the bank" or "if we permit an early withdrawal of principal". Look for banks with disclosures that give the CD holder the right to make an early withdrawal subject to the penalty. For example, I’ve seen disclosures that say "you may make withdrawals subject to the early withdrawal penalties stated below.” Note, banks often change their disclosures. Make sure you review their latest disclosure before deciding on their CDs.

It should be noted that one can only minimize the risk of a bank or credit union refusing to allow an early withdrawal. There will always be some risk that the institution won’t honor its CD disclosure or will use a vague section of their disclosure to justify its refusal. As we learned over the years, the regulators like the NCUA can’t be relied upon to enforce CD disclosures. It can take a lot of time and resources to successfully force an institution to honor its CD disclosure. This case of the Achieva Credit Union add-on CD is a good example of what it can take to win a fight against a credit union that doesn’t honor its CD terms.

Finding a safer CD

If you think some CDs for your “safe” money still makes sense incase rates don’t rise in the next few years, look for CDs with the following two attributes:

  • CD has a low early withdrawal penalty. The best long-term CDs have EWPs of six months of interest or less. You can see how EWPs compare in this DA CD study.
  • CD disclosure does not give the bank the right to refuse an early withdrawal request. Instead, it gives the CD holder the right to make an early withdrawal subject to the EWP.

Of course, the CD rate will always be an important factor to consider. Is the CD rate high enough compared to the rates of liquid account alternatives? If you feel fairly confident that you’ll be able to make an early withdrawal with the disclosed EWP, you can review the effective yields of CDs closed early (that factor in the EWP) during the term of the CDs by using our CD Early Withdrawal Penalty Calculator. In this EWP Calculator example, I compared the effective yields of 5-year CDs from two credit unions. Both have top rates, but their EWPs are very different. As you can see in this example, a CD with a 6-month EWP closed early may very likely beat the top savings accounts even if rates should happen to rise in the next year or two.

To find the highest CD rates, please refer to the DA CD rate table. You can choose terms from three months to six years and over. To review the EWPs, click on the “details” button at the end of each CD row. The row expands with details of the CD and the institution. One of the CD details is the EWP. If the EWP is not listed, the institution does not make its EWP information available on its website.

Related Pages: 1-year CD rates, 5-year CD rates
  |     |   Comment #1
Rates won't stay low for years, they've already done that.
  |     |   Comment #2
Define "Low".
Last time they rose it seemed like a quick blip in time..
..then down they went again. :(
  |     |   Comment #3
If you are mostly in CD's you should be laddering them. If fully invested you should have CD's maturing every 3 months, every 6 months, or every year or what ever time span you set up. So it would not matter. You will be making more interest than sitting in a savings accounts maximizing your income for that time period but in a few months you would be having another CD mature. You never put all your money into one CD, just like if you were in the market you would not put all of in one stock or one mutual fund, you would diversify. As you have your CD ladder set up you can add to each of those CD's as they mature if you so choose. Make all your money work for you all of the time, whether in CD's, reward checking accounts etc. It is too hard making up interest you lost while waiting. But if you have only one CD going long term now is not the choice I would make at this time. Make your plan now and while you are doing it make your money work for you and start a reward checking account with a high balance, or two or three with a lower balance. You can make a minimum of 3% and no CD will do that for you now. A wife can have a joint with her SS number and a husband can have a joint with his SS number in each of the banks or credit unions while you are waiting for rates to go up.
  |     |   Comment #4
ALLY6770, I have a variety of laddered CD's but have been moving maturing ones to a 60 month add-on. It is currently more money in one CD than I have ever put in one place and will be quite large in 2024 when it matures and who knows what options may be available then. I also take advantage of some other CD's where I can get a 2% return but I am curious how one can make 3% in a reward checking account as you describe in your comment #3. Thanks in advance.
  |     |   Comment #5
On Deposit Accounts webpage, put your pointer on checking and it will drop down, click on reward checking. Then put in an amount that you can or will put in your checking, put the state that you live in check the box for banks, credit unions, check internet and local. It will sort to the highest amount of money you can earn for the amount you put in. You can change anything at any time. Click on a bank or credit union's name and read. Then click on details and read. You will find some that fit your situation. I use only one reward checking now because I don't want a lot of interest because I convert to a Roth as much as I can but stay below the amount so that my Medicare premium will not go up. My children are near retirement and I want them to be able to use it tax free when they inherit it. I use extra savings to gift to them each Jan 2. Each credit union or bank for reward checking accounts have different requirements. Choose the ones that fits your circumstances. There are many that pay 3% and some even paid more. Another one by me is a small credit union that is only for my county and the connecting counties that pays 3% up to $25,000 and 12 debits as a signature or pin for any amount and you must look at the account once a month. No direct deposit is required. People use the interest for their debits and use the extra money to switch to another reward checking that will allow a transfer as a direct deposit. Not sure that many still allow that. Because I don't want a lot of interest now I have only 1 reward checking that pays 3% up to $15,000 if I look at my account 4 times a month, if I have 1 direct deposit, if I use my debit card as a signature or pin 10 times a month for any amount. When I go to the grocery store usually once a month I go through the do it yourself express lane scan 1 item use my debit card and pay for it. Put another one the counter and pay for it. I have my 10 items in one trip. I have in the past even purchased a bunch of bananas and put one on the counter at a time cuz I did not need anything. At home I peel my bananas, cut them in half and freeze them and put it frozen in the blender for my smoothies with 1/2 scoop peanut butter protein powder and 1/2 scoop of chocolate fudge protein powder, a cup of no fat chocolate or white milk and up to 15 ice cubes. I have a Ninja and it will be thick like a malt. It makes 2 16oz malts. There are reward checking accounts that in the past allowed using your debit card to make $1 payments on your electric or heating bill every day until your debits were made. I would not use my debit card on line but at an electric or gas company it might be OK. Because I am a widow and have a large freezer, and stock up when thing are on sale, do couponing and use grocery blogs there are times I have a hard time finding 10 things I need for the month, so I also will go to the $1 store next door to one of the grocery stores I use and get my birthday cards, anniversary cards, get well cards, and sympathy cards. They are 50¢ to $1, purchasing one at a time. The only bad thing is that using a reward checking account you cannot compound the interest, which I have always done with my CD's. But it also is a good place for your emergency money. It is always available if needed.
  |     |   Comment #6
I admire your tenacity! And not to be (too) negative except in a positive way…is this what we have become? Why does a grocery or…pay fees/costs for this foolishness! Use to be minimal purchase amounts required, low $ amount would trigger an alarm/fraud notice and shut down the account, etc. but not in America or so it seems. Soooo, when I go to the store to buy in one transaction my bananas i now know who is really paying those rebates…me in the higher priced bananas!  Got it.  Have a nice and profitable day!   PS you’re welcome.  PSS. But upon further reflection and a believer in it being easier to reduce expenses than raise income…I’m going to cut back on spending by about $40 a month including no more bananas.
  |     |   Comment #7
I have had this account since 2009 and have done this monthly. Before I had this account when my husband was alive and still able to drive we had 2 checking accounts that paid either 6.25 or 6.5% until 2009 on $25,000 for 10 debits with the same requirements. When the interest went down we changed credit unions. I go to the store once a month anyway and can usually get 10 items that are on sale. When I need more groceries on a sale I use my cash back credit card. My husband would buy a Free Press, an apple fritter and got a free top off for his thermos on his trip 20 minute trip to town so he had his 10 debits with something he did anyway. He would do the crossword puzzle on the way to town. Only a few times did he not finish it in the 20 minutes before he got to town. Only a few times have I had to put each banana on the scanner individually but I need & use the bananas regularly in the summer for the smoothies so do this when I don't need anything and my supply of bananas are low. Also during the COVID shut down this credit union gave the interest to you even if you did not make the purchases. But thanks to bank deals and then deposit accounts I have been able to get the best interest rates without using the WSJ or USAToday at work or the library or calling long distance to Wisconsin every week years ago when you had to pay for long distance to get the best rates for each time span. I have laddered CD's since we started with our first CD at Industrial State bank with an 8% CD that is now part of Comerica. I also used Comerica 6 month CD's with my oldest son's college money to get round trip airline tickets for $38 to Hawaii. I now also have a savings paying 1% up to $50,000 and 1.5 over $50,000 in a credit union that is just for my county and the surrounding counties. Reward checking accounts are perfect places for emergency funds. With Ken's site it helps all of us!!!!
  |     |   Comment #8
Neat…kudos to you and your family.
  |     |   Comment #9
Where I live if you paid for one banana at a time or did 10 transactions at the self checkout you would probably be shot. For an extra 2% a year on $10k? Forget about it!

Extra 5%? ...hmmmmm.... maybe. :)
  |     |   Comment #10
When I was in a grocery store near me someone was doing multiple single purchases with a debit card. The people waiting were very upset myself included. They gave this person a hard time.
  |     |   Comment #11
I can certainly can understand that. Because of my schedule, age and other factors I usually am to the store at 6 am. Right now it is not open 24 hours a day. I can park near the front door, there are very few people, and can find all the products I want. My store is stocked over night. I think the stores still sets aside hours for the first responders, all medical personnel, elderly and others with health issues where I live
  |     |   Comment #12
In NY if you had one person behind you and they had to wait a few extra seconds they would go nuts.
  |     |   Comment #14
At 6 am no one is in the self checkout. Maybe 3 people. There are about 20 self checkouts at each end of the store. Takes 4 to 4 1/2 minutes to do 10 bananas. People can do up to 20 items in some of our self checkouts.
  |     |   Comment #17
I'm for it if it works for you and the time investment is worth it for you. I'm not getting up early to be at a grocery store at 6 in the AM and one near me are open that early.

My Chase charge card gives me 5% cash back till the end of the year on groceries (Not at Walmart or Target but have 5% discount CC at Target on all purchases). When Chase 5% ends I have an Amex Blue card that gives me 3,% cash back on supermarket purchases. The cash back is not reported to the IRS.

I don't use debit cards as they do not have the same safety mechanisms against fraud. When I had unauthorized charges on my T Mobile card I never used it was difficult to het the charges removed.
  |     |   Comment #15
I never have cash. Only a debit card, a cash back credit card and a check book. I write checks for property taxes and gifting. No one is ever in the grocery store at 6am. Have been in only one of the credit unions I belong to once last November in the last 2 years. I deposited at $25 rebate check from my Sonicare toothbrush. It cost $100 at Costco and after the sale, coupons and rebate I paid $15 for the same model. It is a spare cuz mine is 5 years old. So depending if use the $15,000 or the $25,000 checking account, I make either $37.50 or $62.50 for 4 or 4 1/2 minutes once a month buying 10 items I need. How much do you make in 4 1/2 minutes? I may stop at one of my other credit unions the next to Costco the next time I go. They have a locked box to put the paperwork in you want to have shredded. Every time I clean out my files I have a lot of paper and it takes too long to do it at home.
  |     |   Comment #16
Hey I'm not knocking you if it works for you and you feel it's worth your time go for it. It only takes me less than 5 minutes to open a CD with a cash back credit card and get the same or better rate. I can do this online so it's convenient and not much work to keep up with. I tried doing several debit card transactions at a gas station once and lets just say it didn't work out too well. The pump shut off, I had to go inside and there was a line of really angry folks behind me. I wasn't aware that there was some kind of limit placed on the gas pumps(lesson learned).
  |     |   Comment #18
Never use a debit card at a gas station. I use 5% cash back credit card for my gas at Costco. I don't think I would even use a debit card at Costco gas pumps.
  |     |   Comment #20
I never use debit cards period. They're simply too risky IMO. Credit card or cash are my go to's for spending. (Checks for the occasional bill if they're more convenient/fee free).
  |     |   Comment #21
Let us not devolve into a banana republic.
  |     |   Comment #22
I am all for the purchase of what ever helps someone pay their bills and move forward without falling into the stock market craziness. That is at our later yrs. we are not guaranteed to be watching your stock everyday and cds are the way to go... With this ongoing low interest rates they are trying to force us into the market... Well, again not at our age... What are we to do ... Well, don't fall for it as some of the very people you try to believe are not on your side... Bank rep. salaries are moving higher as we speak.because some of us with cds came due for at least the last yr and half. are sitting in high yield saving acc... I,m all for bananas.
  |     |   Comment #23
I really do not want another CD. My last 3 were 4.2, 3.8 and 3.5. I had one 10 year CD mature a couple of weeks ago and another 10 year will mature in Oct.
There is a credit union building a 38 acre corporate office in my city and will open around Labor Day. I have a great or grand nephew working there and know another person in the trades working there and confirmed it with someone working for the credit union. Watch for Ken's post if they they have good rate on a CD or some type of account. The last one was several years ago and I think after the crash for 7% for 70 weeks but a $25,000 limit. We shall see if they do anything great or I am not going to get another account and just convert more to a Roth every year. I have had money at this credit union nearly every year since 1959 but if they have a good CD rate-------. Happy saving and investing and watch and read Ken's posts he gives us all kinds of great suggestions and lots of help.
  |     |   Comment #24
And the name is? Thanks
  |     |   Comment #25
Sorry I am behind in my emails. I just went to the website to see if anything was posted yet. Nothing. I did read that this credit union is only available in 3 states. I did not know that. We have been members since 1959 when it was in a house. Ken will post if they do anything special.
With COVID on the rise and the interest so low I am not sure what they will do.

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