Key insights:
- A certificate of deposit is a savings tool with a set term and interest rate
- CDs offer predictable earnings and make it easier to avoid dipping into your savings, since there’s usually a penalty for withdrawing early
- If you’re looking for a more flexible savings tool, a CD may not be the best fit
If you’re looking for a savings tool with predictable returns, a certificate of deposit (CD) may be worth exploring.
When it comes to saving money in a bank account, you have options. A traditional savings account may work well for certain day-to-day savings needs, and a CD is an account with a fixed term and set interest rate that may help you grow your savings. Consider the advantages, drawbacks and unique features of a CD to determine whether it may be a worthwhile savings tool for you.
How does a CD work?
A CD account is a type of savings account that has a set term and annual percentage yield (APY), which determines how much interest your money accrues.
When you open a CD account, you agree to a fixed CD term. Terms may last from several months to several years. Throughout the account’s term, you typically can’t access the money you’ve deposited without paying an early withdrawal penalty.
Interest accumulates at a monthly or daily rate. When the term ends, you may withdraw your initial deposit plus any interest earned.
There are a few different types of CD to consider, each with unique features and requirements. Citi offers the following:
- Fixed rate CDs: A fixed rate CD comes with a fixed interest rate that won’t change throughout the term. At the end of the term, you may collect your funds and the interest earned.
- No penalty CD: A no penalty CD allows one-time withdrawal of full balance and interest without penalty at any time after the first six (6) calendar days of making minimum deposit . You can still count on the fixed interest rate.
- Step up CD: The interest rate on a step up CD automatically increases at a set interval, like every 10 months.
Advantages and disadvantages of CDs
CDs can be a predictable way to earn interest on your savings. However, they’re not without drawbacks, especially if you value flexibility.
Pros of CDs
- Better interest rates than other options: CDs typically have higher interest rates than many traditional savings accounts.
- Predictable earnings: For traditional savings accounts, the APY may vary depending on market conditions. But with a CD, you lock in your APY at account opening (or, for step up accounts, you lock in a rate with preset increases). You also choose a set term, so you can see exactly how much you’ll earn from the start.
- Less temptation to spend: With a standard savings account, the temptation to spend might lead you to withdraw money before it has a chance to earn interest. Most CDs penalize you for taking out funds early, which could curb unnecessary spending.
- Variety of terms: CDs come in a variety of terms, from a few months up to several years. Citi CD terms, for example, range from 3 months up to 5 years. Choose the term that makes sense for you, based on your savings goals and financial flexibility.
- Protection: Unlike stock investments, money deposited into a CD at an FDIC-insured bank may qualify for FDIC deposit insurance coverage. FDIC insurance is capped at $250,000 per depositor for each account ownership category at a covered bank.
Cons of CDs
- Lack of flexibility: Once you deposit money into a CD, you generally have to keep it in the account until the term ends, known as the maturity date. Otherwise, you may pay a penalty for withdrawing your funds early.
- Potential to lose money: If you have an emergency and have to access your funds, you may actually lose money if penalty charges exceed interest earnings.
- Minimum deposits: Banks typically require a minimum deposit amount to open a CD. Make sure you can afford to put that amount of money aside before opening an account.
- Fixed APY: The fixed returns typically offered by CDs have a potential downside. If rates go up after you open the account, your CD rate is locked and will not change during the CD term.
Are CDs worth it for you?
Considering a few factors may help you determine whether a CD is the right tool for your goals and current financial circumstances.
Your savings timeline
You should typically deposit money into a CD only if you won’t need to access it for the full term.
If you have a major purchase, like a home, coming up soon, or your income isn’t stable, a more flexible savings tool might make more sense. But if you’re saving up for a longer-term goal, like a vacation or wedding, a CD could be a valuable tool.
You might also consider a CD if you’ve recently received an unexpected windfall that you won’t need to access for a while.
Current CD interest rates
A CD’s APY determines your returns, so it’s one of the most important factors to consider. Interest rates for CDs typically follow general interest rate trends.
When the Federal Reserve raises interest rates, that may translate to higher CD APYs, and vice versa. Some banks may offer better CD rates than others, so rate-shopping is key. You can check Citi current CD rates anytime online.
If interest rates are on the rise, it may make sense to wait to open a CD so that you can capture those higher APYs. However, if rates are expected to decline, getting a CD sooner may help you avoid locking in a lower rate.
Inflation rate
Before you lock into a CD, check the current inflation rate. If possible, try to consider projected inflation rates throughout the term length, too. If the inflation rate is high and seems to be going up, your money may lose its purchasing power by the time the term ends.
When are CDs a good investment?
A CD may be a worthwhile investment in many circumstances. For example, you might consider a CD if:
- You’re looking for a generally low-risk account that offers a predictable interest rate
- You want to make progress toward medium- or long-term savings goals, especially if interest rates are expected to drop soon
- You prefer to keep savings out of easy reach, to avoid the temptation to spend
You may be even better positioned to open a CD if you have other savings, such as an emergency fund, to fall back on. That way, you’d be less likely to make an early withdrawal and potentially pay a penalty if an emergency pops up.
If it sounds like a CD is the savings tool you’ve been looking for, then the next step is finding the best fit. Consider the different types of CDs available, explore potential rates and look into requirements like minimum deposits to find a CD that works for you.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
