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What Are the Benefits of CDs?
Key takeaways
- Certificates of deposit, which typically provide fixed interest rates over a set period of time, offer predictable returns and stability regardless of economic fluctuations
- CDs encourage disciplined saving by keeping funds locked for specific terms ranging from three months to several years
- Banks typically do not charge maintenance fees on CDs but offer flexible terms and options like low minimum deposits. CDs also are FDIC insured, which means that balances are insured to at least $250,000 per depositor, per ownership type, per insured bank
A certificate of deposit (CD) is a low-risk savings option that offers a variety of benefits, such as predictable savings growth and strong protection for your money.
The interest rate you can earn on a CD is typically higher than the rates available for a traditional savings account. Whether you're saving for a short-term goal (such as a wedding or vacation) or longer-term security, CDs are a safe, stable, and structured way to grow your assets.
10 benefits that CDs provide
One of the essential elements of a CD is that it's a time-deposit account. In exchange for predictable savings growth and a fixed interest rate, the money typically remains in the account for a specific length of time, called the "term."
Even though CDs feature fixed interest rates and preset terms, they also can provide flexibility in various ways. Let's look at the key advantages that CDs provide.
1. CDs offer fixed interest rates
During uncertain economic conditions, CDs are literally "money in the bank," providing a fixed interest rate locked in at the time of purchase. In addition, the interest compounds, meaning that the interest earned is added to the principal and begins accruing even more interest.
The interest rate on a traditional savings account can fluctuate based on the benchmark Federal Funds rate, which is set by the Federal Reserve. Putting your savings into a CD eliminates your exposure to what's going on in the wider economy by giving you a locked-in rate
2. CDs are a safe and low-risk savings option
Certificates of deposit are a safe option because they are FDIC-insured, meaning balances are protected to at least $250,000 per depositor, per ownership type, per insured bank.
3. CDs offer higher interest rates than regular savings accounts
Banks generally offer more attractive interest rates on CDs than on traditional savings accounts because they know they're going to be holding your funds for a fixed period of time.
4. CDs encourage disciplined saving
People who are interested in saving to stabilize their financial footing often turn to CDs. This is especially true of Millennials and Gen Z.
They appreciate that CDs take some of their money "off the table" for a certain period of time.
CDs enable savers to take a longer-term and disciplined approach. In addition, many CDs have low minimum deposits, making them accessible to savers of all ages.
5. CDs give you predictable returns
When you have a fixed rate and a fixed term, you know what your CD will be worth at maturity. It's a secure way to save money and you can budget accordingly, with no need for guesswork.
6. CDs have a wide range of terms
CD terms typically start at 3 months and go up from there. Here are the terms you're likely to find at banks:
- 3 months
- 6 months
- 9 months
- 1 year
- 2 years
- 3 years
- 5 years
When obtaining a CD, think about how long you can afford to lock away the money you want to deposit. Choose the CD term accordingly—even if you are looking at no-penalty or early-withdrawal CDs.
7. CDs are useful for short- and long-term goals
CDs can help you achieve a savings goal, especially if you have a particular time frame in mind.
Because a CD is secure and predictable, you can determine before you purchase one that it will meet your goal. You also can purchase different CDs to correspond with different goals or set up a CD ladder.
8. CDs are free of maintenance fees
There's no fee when you buy a CD, and banks don't typically charge maintenance fees as they might do on checking and savings accounts. A regular savings account may have a monthly maintenance fee or a penalty for too many withdrawals within a statement period.
However, there may be fees for early withdrawals of money from a CD. Early withdrawal penalties can come as a set fee or as a number of days' worth of interest. The penalties might even eat into your principal. Even no-penalty CDs have rules on withdrawing money that must be followed carefully.
9. CDs help diversify your savings strategy
You need different types of savings for different needs. CDs can be one part of your savings strategy.
For example, you could use a regular savings account for an emergency fund, because they are so easy to access.
Meanwhile, you can use CDs of varying terms to save money for specific goals, such as a wedding taking place in a year, a vacation in two years, or a new car in three years.
10. CD laddering gives you flexibility
A CD can be a one-and-done proposition: You put money in a 12- or 24-month CD and wait for it to mature.
Or you can "ladder" them. A CD ladder strategy enables you to enjoy the stability of CDs but with greater access to your money.
Instead of putting, say, $5,000 into one CD, you can split that amount into several smaller CDs and stagger the term lengths. This way, you regularly have a portion of your CD deposits maturing and becoming accessible.
As each CD in the ladder matures, you can decide whether to buy a new CD and restructure your ladder or place the money elsewhere based on your new financial circumstances and goals.
FAQs
The Federal Deposit Insurance Corporation insures CDs at member banks. If the bank fails, your deposits are insured to at least $250,000 per depositor, per ownership category, per insured institution, irrespective of account type. They are also a hedge against fluctuations in the wider economy.
CDs "mature" after a specific period of time. In general, if you withdraw money early, you will incur a penalty. However, banks may offer liquid CDs, also called no-penalty or no-catch CDs, that allow you to withdraw money before the CD term ends without incurring a penalty. Typically, you must wait a certain amount of time before withdrawing the money, you are allowed one withdrawal during the term, and you can't make partial withdrawals. Banks have different policies for their CDs, however.
With so many types of CDs available, a wide range of savers can benefit from them.
For example, CDs appeal to conservative savers with specific timelines. These savers can lock in a return with a CD that matures just as they’ll need the money.
CDs are valued by risk-averse savers—for example, retirees or those nearing retirement who want to lock in a fixed rate and appreciate FDIC insurance for their deposits. Someone who thinks they have more than enough in their emergency fund can put additional savings into CDs that provide a higher interest rate. With their low minimum deposits, varying term lengths, predictability, and safety, there are CD options for everyone.
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