One reason CDs are useful when rates are so low

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These days, you may want to open a CD for one important purpose.

Key Point

• A certificate of deposit requires you to lock your money for a pre-set period of time.
• CD rates are low now, but opening a CD can be profitable.

There’s a reason it can be more expensive to store money in a certificate of deposit (CD) instead of a regular savings account. CDs tend to pay higher interest than savings accounts and can also give you more income with that cash if you have money you don’t need or don’t expect to use for a while.

Of course, the downside of CDs is that you need to lock your money for a preset period of time. Also, if you cash your CDs early, you risk losing months of interest.

With a savings account, you can always access your money. Also, you can withdraw from your account at will, without penalties.

CD rates are very low right now. For a 1-year CD, the Annual Yield (APY) will be approximately 0.40% to 0.60%. For a $5,000 deposit, that means he earns $20-30 in annual interest.

With a CD rating this low, it’s actually of little value. It’s often a better idea to keep your money in a regular savings account rather than on CDs. This is especially true as interest rates on savings accounts currently mimic those on 1-year CDs. That said, even in today’s low interest rate environment, there is one particular reason to want to open a CD.

everything is forced savings

There’s something about opening a CD that sends the message, “This is money you shouldn’t touch.” If you recently got some cash but are really not confident not to spend it, opening a CD might be a good bet. If you tell yourself to keep it locked up, you may be able to keep the money handy in case you need it in the future, such as in an emergency. costs will be incurred.

Of course, generally speaking, we recommend keeping your emergency funds in a regular savings account so that you don’t have to worry about interest-related penalties if you ever need to withdraw. But given the current state of CD rates, there is little risk of opening a CD from that perspective.

Suppose you invest $5,000 in CDs that pay 0.50% interest and the penalty for early cash out is 3 months interest. If you have an emergency expense and have to close the CD, you’ll lose about $6 in penalties. It hardly matters.

Still, the thought of facing some kind of penalty might make you leave your money alone unless you’re facing an emergency. The fact that it has the potential alone makes the CD worth opening.

Stick to short-term CDs

If you open a CD today, we recommend limiting yourself to a 6 month or 1 year CD. Locking your money in a 5-year CD at current interest rates is not a smart move. It is undesirable to keep interest rates too low for an extended period of time.