You may want to open a CD these days for one key purpose.
There's a reason it sometimes pays to keep money in a certificate of deposit (CD) instead of a regular savings account. CDs tend to pay higher interest than savings accounts, and if you have money you don't expect to need or use for a while, you might as well earn more on that cash.
Of course, the downside of CDs is they require you to lock your money away for a preset period of time. And if you cash out your CD early, you'll risk losing several months' worth of interest.
With a savings account, you can access your money whenever you want. And there's no penalty for taking withdrawals from your account as you please.
Right now, CD rates are really low. For a one-year CD, you're looking at an annual percentage yield (APY) of roughly 0.40% to 0.60%. For a $5,000 deposit, that means earning $20 to $30 in annual interest.
When CD rates are this low, they really offer little value. In many cases, it pays to keep your money in a regular savings account, not a CD. This especially holds true since savings account interest rates right now mimic those of the one-year CD. But that said, there's one specific reason why you may want to open a CD, even in today's low interest rate environment.
It's all about forced savings
There's something about opening a CD that sends a message along the lines of "this is money you shouldn't touch." If you recently came into some cash but don't really trust yourself not to spend it, then opening a CD may be a good bet. If you tell yourself you're locking your money away for a year (or whatever CD term you land on), you may really be more apt to leave it alone so it's there when you need it in the future, such as when an emergency expense arises.
Of course, generally speaking, it's better to keep your emergency fund in a regular savings account so you don't have to worry about interest-related penalties should the need to take a withdrawal arise. But given where CD rates are sitting right now, there's little risk in opening a CD from that standpoint.
Imagine you put $5,000 into a CD paying 0.50% interest, and the penalty for an early cash-out is three months of interest. If an emergency expense arises and you're forced to close that CD, you'll lose about $6 in penalties. That's hardly something to get worked up about.
Still, the thought of facing any sort of penalty might encourage you to keep your money where it is in the absence of facing an emergency. Despite low interest rates, a CD could be worth opening simply due to the fact that it might serve as a means of forced savings.
Stick to short-term CDs
If you're going to open a CD today, it pays to limit yourself to a six-month or one-year CD. Locking your money into a five-year CD at today's rates isn't a prudent move, because rates are so low right now that there's a good chance they'll start climbing within the next five years. You don't want to commit to too low an interest rate for too long.
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December 24, 2021 at 08:00PM
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The 1 Reason CDs Are Useful When Rates Are So Low - The Motley Fool
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