Are Certificates of Deposit Obsolete?

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A certificate of deposit (CD) is a deposit account that pays you a fixed interest rate over a set period. You can close a CD early and pay a penalty but the bank cannot close it (call it) early, unless it’s a very rare callable CD. CDs are nice because they often represent the highest safe return you can get since those deposits are protected by FDIC insurance.

However, when the difference between a 12-month CD and an online savings account is microscopic, you start to wonder if it’s worth the effort. I took a look at one a major online bank (I won’t say which because I don’t want to update these rates when they change, but they are a “friendly” bank and they have very good rates) and their high yield 12-month CD had a yield of 1.29% APY. Their online savings account offered a yield of 1.09% APY. While a 0.20% APY difference is large in relative terms, it’s tiny in real terms.

0.20% APY on $100 is 20 cents. By locking your savings into a 12 month agreement, you earn an extra 20 cents per $100. I’ll be the first to say that every little bit helps, but 20 cents isn’t going to cut it (this is before you carve out a few cents for taxes!).

It makes me wonder, in this era of high yield savings accounts with rates that rival certificates of deposit, have CDs been made obsolete?

{ 34 comments, please add your thoughts now! }

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34 Responses to “Are Certificates of Deposit Obsolete?”

  1. Well, there are some institutions that offer CD’s at much higher rates, but there are still better options than CD’s. Especially with the speculation that rates will raise in the next few years, you don’t want to get locked into a long term CD. I do expect that when (if) rates do rise, they will end up higher than those online savings accounts. So, I wouldn’t say CD’s are dead,… just not a good deal right now.

    • govenar says:

      I thought rates were going to rise a couple years ago too… would’ve been nice if I had locked myself into a long term CD then.

    • Strebkr says:

      I had a few CDs that are coming to term now. They were over 4% which at the time was ok. Now they are my best yielding (cash) investment.

      I think I started a CD ladder because of an article I read here. 1,000 spread over 12 CDs I think.

  2. The difference becomes MUCH more substantial when you compare the rates with those of the high-yield checking accounts, as you discussed in the post before this one. If managed properly, those checking accounts can serve as an excellent emergency fund or savings account, returning a very respectable rate.

    • Jim says:

      And they offer liquidity and flexibility that CDs lack.

    • tbork84 says:

      The number of requirements to qualify for the higher rates in a checking account has gone down quite a bit too. Compared to the lower rate and risk of a CD (strange concept but a real one) the high-yield checking account is a very nice looking option.

  3. freeby50 says:

    Right now CD’s don’t provide much value over a high yield savings account. But when interest rates go back up I think we should expect to see the rates on CDs go up so they are more attractive over short term savings accounts.

  4. Jon says:

    “…you earn an extra 20 cents per $100…”

    Is that per year, per month, per day…

  5. PK says:

    I am using a long term CD as the second tier of my emergency fund. The second half is sitting in a 5 year CD with 3.07% APY. I chose this because the penalty for closing is 2 months interest, and when compared to my savings account it was ahead (including penalty) after 3 months.

    • Strebkr says:

      That 3 month interest penalty is actually a good thing when you are talking about emergency cash in a CD. It might make you question whether it is a true emergency before you cancel it.

      Good rate too!

  6. Nick says:

    I’m a big fan of the Ally bank CDs for money I won’t need for a few months but want on hand for planned use in a year or two or three (i.e. saving up for a house fund or something like that). I use the 5-year CD, which currently has about a 2.4 (but I got it at 2.9). The good thing about it is that they only charge a 60-day penalty, so if you leave the money in for longer than three or four months you end up ahead even by withdrawing the money and paying the 60-day penalty.

    Often I think people don’t consider that it might be worth paying a small penalty to have the option for an FDIC-insured account with a higher rate like the ALLY CDs.

    Much better than an online savings account in my opinion for money that you don’t NEED right away.

    • Jeff says:

      Me too, I have several 5 year CD’s at Ally bank so I can cash them out in small increments if needed for an emergency. Roughly 80% of my E-fund is in Ally CD’s. They also have rate bump, once per my term I can bump the interest up to the current rate. So far it’s only fallen but it’s nice to know that I get a 1 time deal to “reset” my interest rate.

  7. billsnider says:

    I remember in the early 80’s when CD’s were in the high teens. Ditto for inflation. So either way you can’t win!

    Bill Snider

  8. daenyll says:

    at the online bank I use the cd rates are actually less for the 18mo or shorter terms than just leaving funds in the savings accounts at the moment, the only reason I see at this point to use a cd is to specifically put the money away where it is less liquid but still available ie. for emergency fund where temptation might be a problem or you want to make sure it stays separate from other accounts.

  9. Dylan says:

    It’s not the spread at the time you buy the CD that matters. It’s the spread in the months AFTER you buy it that really matters. If that bank’s rate drops to 0.75% APY in 3 months from now, the 1.29% will look a whole lot better.

    • Vic says:

      Exactly. You want to lock in a rate if you think they are going to go down. Unless its a callable CD, the rate is fixed for the term. Whereas a high yield savings/checking account rate can drop whenever the bank feels like it.

      When helicopter Ben started cutting the interest rates, I locked in a CD at 3.25%. Watched regular savings rates drop progressively lower. Once rates pick back up, laddering the CDs will net the liquidity people seek.

  10. Joe says:

    One thing I like about CDs is that they more or less force you to save. Your money is in there for a specified time and you can’t mess with it to buy that new HD TV that went on sale unless you want to pay the penalty.

  11. uclalien says:

    Simple answer: No.

    Complex answer:
    Like any other investment, there are better times than others to utilize a given investment strategy. As others have pointed out, if you believe interest rates will fall in the future, it’s better to lock in rates via a CD.

    The time spent researching and applying for a CD must also be taken into consideration. It simply isn’t cost effective for most people to spend 15-30 minutes researching, applying, and moving $100 (or even $1,000) from a high yield savings account to a CD to only earn an extra $0.20 (or $2).

  12. Glenn Lasher says:

    I think that the single biggest advantage to a CD is that it tends to enforce discipline. If you want to park some money towards a particular end, and make sure it is still there when you need it (i.e. you don’t spend it), then a CD might fit the bill.

    Otherwise, I suspect they’re not worth it. The returns certainly aren’t that great.

  13. zapeta says:

    I don’t think they’re obsolete, but they aren’t very attractive in the current low rate environment. Laddered CDs can be a useful place for an emergency fund.

  14. Ryan says:

    I think if you “go out of your way” to get a CD just so you aren’t tempted to take from your savings account, is a bad reason to get one.

    I’d say you’re not financially responsible if you dip into your savings account for a new TV (or other wants).

    Set up multiple savings accounts categorized for your different wants/needs. Once your new TV account has enough in it, go get the TV.

  15. aua868s says:

    with a financial commitment 2 years down the lane, I turn to Ally Bank’s CD which I think is one of the best bets I have.

  16. eric says:

    I think CDs are useful when rates are higher but you’re right, right now they’re pretty dismal.

  17. Greg says:

    I go to Ally Bank and get a 5 year CD with ONLY 2 MONTH PENALTY. This CD usually pays 1 point higher than a 1 year CD. So you get $1.00 more per hundred, compared to 20 cents.

  18. jsbrendog says:

    imo they were never worth the time anyway but the fact that the rates are so similar definitely makes them obsolete, at least for now. if things change and the rates become more disporportionate then i could see them becoming more relevant

  19. Marilyn says:

    I don’t think they are obsolete. I think that there are a couple things to remember. Not long ago, a lot of people lost large sums in their IRAs, 401(k)s, etc. They lost a lot of money that they would truly need one day. Most have not regained that wealth. I’m not recommending CDs as a way to fund retirement but even the best returns are abysmal right now. If the money in the CD is money that you absolutely cannot risk for whatever reason then CDs are a safe way to earn a little more money than you had in the first place while your initial investment stays sound.

  20. jm says:

    Callable CDs are more common than you think – especially if you buy them through a broker. (Banks sells CDs on their own and also through brokerage accounts). Be sure to ask the details before buying them.

    Additionally – when CD rates are great, stocks are down. If you’re a long term investor (ie 10-15 plus years until you need the money), why tie your money up making 1%? It’s likely going to the mall and refusing to buy your favorite pair of jeans on sale and instead waiting until they go back up to full price. Be smart and think long term.

  21. adam carolla fan says:

    i’ve always loved CDs. it’s simple to do, and you don’t need to be super-savvy when it comes to investing, so they’re perfect for a novice investor.

    years ago, when rates were 4-5%, investing in CDs was awesome. locking in those rates was a great feeling.

    CD’s are not obsolete – when interest rates pick back up, they’ll once again have their time.

  22. Anonymous says:

    CDs can be a decent short term savings but to have a CD with a term of more than 24 months is a horrible investment. In the article it mentions high safe return. Well the rates are difinitely not high and if you mean safe by no risk of loosing value then you are also wrong. Don’t forget inflation devalues your investment so right now with inflation at 3-4% a 1% CD is losing value. Also how much faith do you have in FDIC? Why not use another insurance company to insure your money? CD’s have always been a poor choice but now with rates so low they are obsolete.

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