Pros And Cons Of Using a CD For Your Savings

Financial products are just tools you can use to support your money management. The key is to use the right tool for the right job, otherwise you’re vulnerable to heartache.

Certificates of deposit (CDs), which are time deposit accounts that hold your money for a specific length of time and earn you interest, are collecting dust in America’s collective tool chest. Less than 7% of American households have one, per the Federal Reserve, and the few that do hold relatively scant assets compared to brokerage and retirement accounts.

Still, CDs come with a host of benefits (albeit with some trade-offs) that are worth your consideration.

How does a CD work?

Pros of Using a Certificate of Deposit for Savings

CDs, like savings and money market accounts, typically come with FDIC insurance ($250,000 per depositor, for each account ownership category, per financial institution) offered through your bank (or NCUA insurance for credit union members). Your job, then, is to determine whether the particular advantages of CDs fit your needs.

1. Guaranteed Returns

With a CD, you know what you’re getting. If you plop down $10,000 in a one-year CD with a 4% APY, you’ll walk away a year later with $400 in interest earnings in addition to your original deposit.

That kind of certainty can be extremely useful, depending on your circumstances. For instance, if you plan on purchasing a new car in a year, you can put your down payment into a CD and earn a bit extra for your trouble.

2. Forced Discipline

When you sign up for a specific term, you typically don’t have access to the money before the end of the term without paying a fee.

This inflexibility can be useful when trying to discipline your spending and saving behavior.

Take the car example from above. If you had your down payment sitting in a high-yield savings account, you might be tempted to “borrow” from your savings to buy something else you want at the moment.

But, by putting that cash into a CD, you’re setting up guardrails to stop you from grabbing it without due consideration.

3. Higher Rates for Longer

Interestingly, the top high-yield savings accounts tend to pay roughly the same APY as the most generous CDs (depending on yields).

You might then ask: What’s the point? If I can get a similar APY from a savings account, why go through the trouble?

Aside from the forced discipline mentioned above, you can lock in your CD interest rate for a set period of time. Savings accounts, on the other hand, are variable and can shift as the banks see fit.

Let’s say you’re a retiree who wants to keep five years’ worth of spending in cash. You can opt to put a portion of your savings into a five-year CD, thereby locking in a relatively high interest rate for half a decade.

4. Sophisticated Savings Strategies

If you’re worried about lacking access to your cash for the duration of a specific CD term, you can create a savings strategy that provides regular liquidity while also earning high yields. That strategy is known as CD laddering.

In a CD ladder, you divide your savings among a set of CDs with staggering maturities. When the shortest-term CD ends, you can use the cash for some pressing need or reinvest it in a longer-term option.

For instance, you could split your savings evenly between a three-month, six-month and nine-month CD. When the three-month CD matures, you could then open another nine-month CD and start the process again.

This strategy allows you to take advantage of the best rates on the market while freeing up some of your savings.

5. No Monthly Maintenance Fees

Unlike some savings accounts, CDs come with few fees (we’ll mention one below).

For instance, there are rarely monthly maintenance fees. This helps keep more of your savings working toward your financial goals and limits nickel-and-diming.

Cons of Using a Certificate of Deposit for Savings

Of course, there are trade-offs to consider.

1. Accessibility

As mentioned above, CDs are rather inflexible tools.

With a savings account, you can access your money whenever you want. CDs, on the other hand, are designed to be left alone until the term matures.

If you really want your cash out of a CD, you can typically withdraw it early, though you’ll pay a stiff penalty to do so.

2. Early Withdrawal Penalties

Unless you have a no-penalty CD, be prepared to pay an early withdrawal penalty if you end your CD before maturity.

The actual penalty depends on your particular bank and CD term. For instance, a six-month CD from Ally has an early withdrawal penalty of 60 days’ interest. If you haven’t earned enough interest to cover the fee, you’ll have to cough up a portion of your original balance.

Therefore, make sure you can afford to be without your savings for at least as long as the term you select.

3. Interest Rate Risk

One benefit of a guaranteed interest rate for a set period is that you can potentially lock in a relatively high rate before general interest rates fall. Unfortunately, the flip side is also true.

If you lock in a two-year CD, for instance, right before interest rates rise, you’ll miss out on those potential gains.

One way to hedge these risks is to use a CD ladder, as mentioned above.

How To Choose a Certificate of Deposit

Once you’ve decided what CD term you want (typically ranging from three months to 10 years), it’s time to go shopping.

Just as you would with hotels or cars, begin your search by comparing the alternatives from various banks. When you do so, consider the following:

APY
Minimum deposit requirements
Early withdrawal penalties
CD renewal policies (Banks typically let you know a month out from your maturity date that your CD will soon end. At your maturity date, you usually have between seven and 10 days to cash out. Otherwise, the bank will renew you into a new CD of the same length.)
Compounding schedule (Daily is preferable to monthly, which is preferable to quarterly.)
Bank reputation (This can be subjective, but talk with friends and family about their experiences with a particular financial institution.)

Should You Get a CD in 2025?

CD yields skyrocketed in 2022 and 2023 when the Federal Reserve dramatically increased the federal funds rate to stymie inflation. In 2024, yields leveled off and then retreated as market participants correctly anticipated the Fed cutting rates by the end of the year.

Yields are likely to remain relatively stable in the short term before slowly drifting down by the end of the year. The Fed is in wait-and-see mode, as inflation remains above their target while the labor market endures, despite some signs of weakness.

Therefore, the rates you see on current CDs are likely to be what you’ll see later in the year.

Whether or not you should opt for a CD depends on your particular savings needs.