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?