Are CDs worth it?

When it comes to saving money, there are several strategies to choose from, each with benefits and potential drawbacks. One popular choice is a certificate of deposit, or CD. CDs can be an attractive option for most savers—particularly in a higher-interest-rate environment.

Determining whether CDs are worth it for you, however, depends on several factors, including your financial goals, the inflation rate, your timelines for your savings goals, and your personal savings preferences, including if you prefer to have ready access to your funds. These variables can make the decision-making process more challenging, leaving many people wondering whether CDs are the right choice for them.

But by understanding the advantages and disadvantages of CDs, you can make an informed decision about whether they align with your financial objectives. Here, we take a closer look at CDs and outline the factors you should consider when deciding whether they’re a good option for you.

What’s the point of CDs, and how do they compare to other savings tools?

Certificates of deposit are secure medium- to long-term savings vehicles that many banks and financial institutions offer. When you open a CD, you agree to leave your money in the account for a set period—Discover® terms range from three months to 10 years. CDs offer a guaranteed return with a fixed interest rate in exchange for committing your funds for this set period. More accessible savings tools, like savings accounts, have variable rates that can change over time, and CDs may offer higher rates of return than these types of savings tools. And compared to more volatile investment types, the returns collected are predictable and virtually risk-free. 

CDs differ from savings accounts, checking accounts, and money market accounts in a few important ways. First, funds in CDs must remain in the account for a set period versus other accounts that allow ongoing access to funds. If you need to access the funds in a CD before its maturity date, you may pay a penalty for early withdrawal.

Second, unlike traditional checking or savings accounts, you can’t add money to an existing CD account once it has been funded (although you can open a new CD to invest additional funds).

Finally, opening a CD could require a higher minimum opening deposit than a savings account, which might have no minimum. There is no minimum deposit required to open a Discover CD. You have 45 days after opening the CD to fund the account.

What are the benefits and tradeoffs for CDs?

Like any investment, CDs have pros and cons to consider. Here are some of the main advantages of CDs:

• Security: CDs are Federal Deposit Insurance Corporation (FDIC)-insured, if the bank is an FDIC member. FDIC insurance protects up to $250,000 per depositor, per insured bank, per deposit ownership category. This means your money is safe—even if the bank holding the CD fails.
• Higher interest rates: CDs typically offer higher interest rates than savings accounts.
• Predictability: When you open a CD, you know exactly how much interest you’ll earn during its lifespan and when you can access your money. Stocks, mutual funds, and even bonds can be volatile and much harder to predict.   
• Flexible time spans: CDs are available in a range of terms, from a few months to several years, so you can choose the one that best fits your financial planning needs.

CDs also have some tradeoffs to be aware of:

• Restricted access to funds: Once you put money into a CD, you won’t be able to access it until it matures—unless you’re willing to pay a penalty for early withdrawal. Try aligning your CD timelines with goals—for example, a three-month CD ahead of a vacation versus a multiple-year CD when saving for a home. Discover CD terms range from three months to 10 years. 
• Potential opportunity loss: CDs usually offer higher interest rates than savings accounts, but they might not have the return potential of other investments like stocks or corporate bonds. Of course, they also have less risk, and combining CDs with other assets may be a good way to ensure your portfolio is diversified. 
• Reinvestment risk: If you choose a longer-term CD and interest rates rise, you could miss out on higher yields. Alternatively, if you choose a shorter-term CD and rates fall, you might see lower renewal rates on CDs compared to what you were earning. Consider dividing your funds via a CD ladder strategy—see more about this below—which allows you to take advantage of different rates while also providing occasional access to some of your cash.

Are bank CDs worth it?

When deciding if CDs are worth it, there are a few key factors to keep in mind:

Interest rates

The interest rate environment is among the most important factors when considering opening a CD. In many environments, the longer the term of the CD, the higher the interest rate. But rates on CDs follow the general interest rate environment, so if interest rates rise, CD rates will likely follow. If interest rates are falling or are expected to fall, longer-term CDs might have lower rates.

And sometimes banks will offer higher promotional rates on shorter CD terms. Some banks might also offer special rates for new customers, or a bank may require a higher minimum deposit to access the best rates. As with any money matter, you should compare rates to ensure you get the best deal.

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Rate of inflation

Inflation is the rate at which the prices for goods and services become more expensive. If the inflation rate is higher than the fixed interest rate on your CD, the actual purchasing power of your money can decrease over time. Say a 5-year CD earns 4% interest, but annual inflation rises to 5%—the real value of your money will decrease 1% over the years that your funds are locked in a CD. Consider the current and projected inflation rates when deciding whether to purchase a CD (especially a longer-term one).

Access to funds

CDs are designed to be held until maturity, and most banks impose penalties if you withdraw your money before the term ends. Penalties can be substantial and could erase any interest earned, so it’s crucial to understand the terms of your CD and ensure you most likely won’t need to access the funds early. If there’s any chance you’ll need to withdraw the money before the end of the CD’s term, consider a shorter-term option or a more liquid option like a savings account.

Tip: Many banks provide a choice to withdraw the interest earned on a CD or reinvest it back into another CD.

Michelle Schroeder-Gardner, founder of the financial blog Making Sense of Cents, offers an additional suggestion: “You may want to put money in a CD when you have a lump sum that you don’t need immediate access to.” She also says that CDs might be a valuable tool for retirees to generate extra risk-free income. “Younger people who have more time to invest might prefer stocks or bonds, which can have higher returns and be easier to access.”

Making a decision and taking the next steps

Still asking yourself, “Are CDs worth it?” Here are a few additional tips to help you make the most of your money:

Factor in your financial goals

CDs can be a good choice if you have a specific financial goal, such as saving for a down payment on a house or a child’s education. By aligning the term of your CD with your goal’s timeline, you can ensure your money will be available when you need it.

Evaluate your risk tolerance

CDs are considered a low-risk asset because they offer a guaranteed return and are usually FDIC-insured. Schroeder-Gardner says if you have a low risk tolerance or are retired or nearing retirement, CDs can be a good choice to shelter your principal while still earning some interest.

Assess the current economic environment

The interest rate environment and other economic conditions can impact the attractiveness of CDs. In a low-interest-rate environment, CDs might not offer a limited yield advantage over other savings options. However, locking in a fixed rate via a CD can be a smart move when interest rates are elevated or rising.

Consider a CD ladder

The CD ladder strategy involves purchasing multiple CDs with different maturity dates. For example, you can open CDs maturing in six months, 12 months, and 36 months. After the first CD matures, you can decide whether to renew, withdraw, or find another investment.

The ladder approach allows you to take advantage of higher interest rates typically associated with longer-term CDs while still having periodic access to some of your money. By staggering maturity dates, you can also reinvest a portion of your money at potentially higher rates as each CD matures.

Read the fine print

Before opening a CD account, compare rates, terms, and conditions to find the best deal. Make sure you understand all the details, including minimum opening deposit requirements, early withdrawal penalties, and any fees associated with the account.

So, are CDs worth it? They can be a smart choice for those looking for a low-risk, predictable way to save money. By understanding the pros and cons and considering factors like interest rates and early withdrawal penalties, you can decide if CDs are right for you. And if you choose to purchase CDs, strategies like CD laddering can help you make the most of your money.

Ready to start saving with CDs? Open a Discover CD account today and earn more on your money.

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The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.