Is It Worth Giving Up Liquidity And Freedom For Such Paltry Savings Rates?

  |     |   119 posts since 2012

Before savings rates plummeted, it was a reasonable question to ask whether it was worth giving up the freedom of a 1% savings account in order to 3% or 4% long term CD. A 200 or 300 basis point difference is substantial; and a three or four percent no risk return is, for many people, a healthy part of an overall financial plan, and worth giving up liquidity.

However, in these days of the Fed's zero interest rate policy; we are faced with a different decision: Should we give up our .50% interest savings account to invest in a 1% long term CD? Let's say you have $20,000.00 to invest. If you move your 1/2 percent savings to a 1 percent long term CD, you will earn $200.00 a year instead of $100.00. Is that extra 100.00 (or extra 125.00 if you find a 1.25% CD) worth giving up the liquidity of those funds for several years; or to face a steep EWP if you need to withdraw them early? Let me ask another way: If a friend called you up and said, "I'll send you a check for $100.00 tomorrow if you promise to place your $20,000.00 in a vault and not touch it for five years, you would question your friend's sanity. Yet that is exactly what we do, when we invest in long term CDs with low interest rates. 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. But remember that liquidity of funds is a precious thing; please make sure it is worth your financial while; don't give up your financial freedom for a few dollars more.

  |     |   869 posts since 2020
I agree with you kc as I prefer liquidity and using a bit of creativity to get a better return. A long term CD would need to be at least 4% for me to lock up funds for 5 years or better. It's far too easy to buy short term CD's with a 2-3% credit card, grab a few bank bonuses without direct deposit or even have the freedom to do some home improvements, take a vacation or make a large purchase etc. Now if CD rates were 6% I would lock them up and get rid of some stock.
Ken Tumin
  |     |   6,146 posts since 2009
Thanks kcfield for posting on this important topic.

This ZIRP environment is definitely making CDs less attractive.

Another thing for savers to consider is the harshness of the EWP. A mild EWP can help make the CD a much better deal. For example, a 5-year CD with a 1.25% APY can result in an effective yield of 0.62% after one year when the CD is closed early assuming a 6mo EWP. That could be a better option than keeping all of your "safe" money in an 0.50% savings account if rates remain low for years.

This DA resource may be helpful for savers considering CDs and EWPs:

As many DA readers know, there are risks in depending on CD early withdrawals. The following article can be helpful on this topic:
  |     |   119 posts since 2012
Ken, that is a very good point--that a good yielding CD with low EWP can functionally serve as a liquid investment when an early withdrawal inclusive of the EWP ends up paying more than a high yield savings account. That is a point I had not considered in my analysis.
  |     |   927 posts since 2020
Always need an exit strategy…net means net! Otherwise it’s gross!
  |     |   80 posts since 2018
If one was lucky during 2018/19 to put a substantial enough investment in 5 year CDs then one might just sit back till 2023/24, maybe continue chasing reward accounts for fun. If not am thinking many will be trying to figure out which dividend stocks are still a good value. So, my answer would be no

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