Here's exactly how to decide if you should put money in a CD

WAYHOME studio/Shutterstock.comA CD can be a good place to store money you don’t need immediately.
  • A CD is an FDIC-insured savings instrument that provides a safe, secure option to store savings you need in the future.
  • While money you put in a CD grows with a fixed interest rate, you can’t take your money out before the term ends without paying a penalty.
  • For that reason, a CD is usually a better option if you’re saving money for the near future. It’s not as good a place for money you might need sooner, or to access quickly.
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For most of the last decade, low interest rates made CDs (Certificates of Deposit) a relatively poor place to put your money. As interest rates crept up a bit over the last couple of years, however, CDs are making their way back into the discussion of where to keep your cash.

CD accounts make the most sense for long-term savings you don’t expect to need in the near future. If you plan to buy a home in a year or more, for example, you may want to put all or some of your down payment in a CD. Your emergency fund, however, should probably stay in a savings account where you can get to it quickly if needed.

Here’s how a CD works, broken down into three pros and three cons:

Pro: Money is safe and secure

The biggest benefit of a CD is that, in most cases, your money is backed by the full faith and credit of the United States Government. At a bank, your CD account is FDIC insured. At a credit union, it is insured by the NCUA. In either case, you don’t have to worry about losing a penny, even if the bank goes out of business.

In fact, this happened to me once! At the start of the Great Recession, I had a CD with a small bank in Greeley, Colorado. When it went under during the mortgage crisis, I got a check from the FDIC for my full balance, including interest, a few weeks later.


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Pro: Interest rates won’t go down

When you sign up for a CD, your interest rate is locked for the life of the CD. Until it matures, your interest rates won’t go down, even if market rates fall. This was a bigger benefit in the past while rates were falling. Right now, this isn’t a major concern.

Pro: No temptation to spend

If you come across $US100 and feel it burning a hole in your pocket, a CD may be perfect for you. Unlike a checking account or cash, which make using your money very easy, a CD makes spending a lot less convenient.

Because you would have to go to the bank, break the CD and pay an interest penalty, and cash out with the bank, you are a lot less likely to spend it before the term ends.

Con: Money is locked away

If you want to get your money before the CD expires, it isn’t the same as making a withdrawal from a checking or savings account. If you want to withdraw from a CD, you have to take out the entire balance.

Better interest rates come from CDs with longer maturity periods. You’ll get a very low rate on a three-month CD compared to a five-year CD, for instance. This gives the bank a bigger guarantee it can lend out the funds for a profit but doesn’t work well if you want to tap into your money early.

Con: You have to pay a penalty to get funds early

If you do decide to break the CD and get out your money before the expiration date, expect to pay an interest penalty. Depending on the bank and the specific CD you choose, you could give up months of interest if you cash out early.

The penalty may not be significant and may be worthwhile in some cases, but it can really add up and take a chunk out of your earnings. If you need to close your CD shortly after opening it, you could end up paying the bank more in interest penalties than you earned from the account.

Con: You can’t take advantage of rate increases

While you are locked in and won’t see your rate go down, you won’t see it go up, either. Last year saw interest rates on the rise, and while the Federal Reserve appears to be slowing down in 2019, rates can still go up.

If rates do rise, you won’t get an benefit until the CD matures. If you decide to renew, you will get an updated interest rate. But for the time being, it will stay put at the original interest rate.

Like all personal finance decisions, this one is personal. There is no right or wrong, just what you are comfortable with and what makes sense for your money. If a CD looks like the right fit, head to your favourite online bank for the best rates. If you are locking them in for a period of time, you might as well get the best interest rate possible.


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