Pros and Cons of CD Accounts (2024)

Pros and Cons of CD Accounts (1)

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Pros and Cons of CD Accounts (3)

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Pros and Cons of CD Accounts (4)

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When making decisions about your financial future, it’s important to understand all your options, including certificate of deposit accounts. While CDs aren’t as commonplace as savings accounts or mutual funds, they’re worth considering based on your investment goals and risk tolerance. Read on to learn the pros and cons of a CD account.

Pros of a CD Account

Discovering the financial advantages that certificates of deposit bring to the table can be a pivotal step in optimizing your investment strategy. Here’s a closer look at the benefits CDs offer.

1. Secure Investments

CDs are a desirable option for conservative investors seeking peace of mind or those approaching retirement who don’t wish to gamble their hard-earned savings on volatile investments. The rock-solid security of a CD allows you to invest with confidence, sidestepping potentially drastic drops in the market that other types of investments might fall prey to.

The Federal Deposit Insurance Corporation guarantees CDs, insuring your investment up to $250,000. This means you have an assurance that your funds remain secure and untouched, even if your bank faces an unfortunate scenario like insolvency or bankruptcy.

CDs provide reassurance of a guaranteed return on your investment, allowing you to focus on your financial goals without fear of catastrophic losses. With a CD, you’re not merely investing your money — you’re also investing in tranquility.

2. Higher Interest Rates

CDs can be rewarding opportunities whether you’re venturing into investments for the first time or you’re an experienced investor looking to diversify for a more predictable portfolio. One significant advantage of CDs over traditional savings accounts is theirhigher interest rates, which can significantly exceed those of other savings options.

With a CD, your money isn’t just resting in your account but actively working for you, multiplying over time. The catch is that you must leave it untouched for the agreed-upon term. If you’re prepared for this commitment, CDs can serve as growth catalysts for your savings.

3. Fixed Interest Rates

Financial markets are often volatile, with stock prices rising and falling at a dizzying pace. This unpredictability might deter some potential investors. CDs offer a comforting counterpoint to this volatility, promising predictable reliable returns. Once you deposit your money in a CD, you lock in the interest rate. It remains fixed and immune to market influences, allowing you to anticipate how much you’ll earn from your investment.

Cons of a CDAccount

While CDs provide a stable investment option, being aware of their potential drawbacks is essential. Carefully consider the following cons before opening this type of account.

1. Limited Liquidity

Imagine putting a significant chunk of your savings into a CD and then experiencing an unexpected major life event or financial emergency. You might need immediate access to your savings, but you’ll face the harsh reality that the money you’ve diligently saved is locked away until the CD’s maturity date.

This lack of liquidity is one of the significant drawbacks that CDs present. When you commit to a CD, you enter into a financial agreement that doesn’t allow for early withdrawals without incurring a penalty, which could range from a loss of interest earned to being left with a fraction of your original investment.

The inflexibility of CDs could also be frustrating if another promising investment opportunity comes your way. With your funds tied up in a certificate of deposit, you won’t be able to move your money to take advantage of a different investment. In such scenarios, the liquidity other financial instruments like checking accounts, can provide makes them an appealing alternative to CDs. It’s essential to consider this drawback in your decision-making process.

2. Inflation Risk

While the security of fixed interest rates is a key attraction of CDs, inflation is one facet that could come back to bite you. If you’ve secured your finances in a CD to steadily grow your wealth, but inflation rates start soaring, tranquil waters can turn into rough seas. Your fixed-interest-rate CD might be insufficient to keep up with inflation.

Though often overlooked, inflation can be a significant drag on your savings. When the rate of inflation outpaces the returns on your CD, the purchasing power of your gains diminishes. In essence, your money won’t stretch as far as it used to, making your well-calculated returns less rewarding in terms of real-world buying power.

High inflation can nibble at the interest earned on your CD, wearing away your investment — and your wealth. While the predictability of CD returns can be comforting, keeping your eye oninflation trends and their implications before committing your funds to a CD is critical.

3. Opportunity Cost

Every investment decision juggles risk and reward, and CDs are no exception. While it’s true that CDs offer a fortified shell against market fluctuations where your investment can grow at a steady pace, this safety net comes with a price: the opportunity cost.

Opportunity costs represent the commitments you make when investing. Sometimes, while your funds are securely tied up in a CD, you might watch the potential for higher returns in other more volatile markets like stocks or mutual funds pass you by.

While subject to market fluctuations, these riskier investments may offer potentially substantial returns, often far exceeding what you can earn from CDs. Investing in stocks or mutual funds might feel like a roller-coaster ride during market highs and lows, but the thrill comes with the prospect of hitting an investment jackpot.

This is the balancing act every investor needs to consider, weighing the assured but potentially lower returns of CDs against the high-risk, high-reward nature of stocks and mutual funds. Ultimately, your final decision should align with your financial goals, risk tolerance and investment timeline. Sometimes, a sure thing is not your best bet.

Weighing the Pros and Cons of a CD for Your Investment Portfolio

While CDs can be excellent investment tools when used wisely, they aren’t without drawbacks. If you have a solid understanding of your financial goals, CDs can serve as one of a number of sound investment strategies.

A solid approach for many individuals might be to include CDs as part of a diversified portfolio. The safety of a CD account can offset any losses you may experience while taking advantage of potentially higher returns from riskier investments. It’s always important to conduct thorough research and seek the advice of afinancial advisor before deciding where to invest.

Explore More on CD Accounts

  • Certificate of Deposit (CD): What It Is and Whether It’s Right for You
  • How To Open a CD Account in 4 Simple Steps
  • How Do CDs Work? Start Stacking Your Savings
  • How Much Money Should You Keep in a CD Account?
  • What Is a CD Ladder? What You Need To Know
  • Best CD Accounts


Here are the answers to some frequently asked questions about CD accounts.

  • How much will a CD earn in 5 years?
    • The amount you earn on your 5-year CD depends on what APY your financial institution offers. For example, if the APY is 2.7% and you deposited $1,000 initially, you will have earned $142.48 in interest at the end of five years, giving you a total of $1,142.48.
  • What is CD laddering?
    • CD laddering is when you invest in a series of CDs and set each one to mature at a different time. This gives you periodic access to some of your money while the rest of it keeps earning interest. You can extend the ladder by rolling that money into another CD.
  • What are the pros and cons of CDs?
    • Here are some pros and cons of CD accounts to consider:
      • Pros:
        • Secure investments
        • Higher interest rates
        • Fixed interest rates
      • Cons:
        • Limited liquidity
        • Inflation risk
        • Opportunity cost
  • Are CDs actually worth it?
    • CDs can be worth it if you are looking for a safe investment with guaranteed returns. The returns are steady but they are lower than other higher-risk investments such as stocks and bonds.
  • What are the weaknesses of a CD?
    • Some weaknesses or drawbacks to CD accounts are inflation risk, limited liquidity and opportunity cost.

Caitlyn Moorhead contributed to the reporting for this article.

Pros and Cons of CD Accounts (2024)


What are the disadvantages of CDs? ›

Disadvantages of investing in CDs

As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty. The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD.

How much does a $10,000 CD make in a year? ›

Earnings on a $10,000 CD Opened at Today's Top Rates
Top Nationwide Rate (APY)Balance at Maturity
6 months5.76%$ 10,288
1 year6.18%$ 10,618
18 months5.80%$ 10,887
2 year5.60%$ 11,151
3 more rows
Nov 9, 2023

Is it a good idea to put money in a CD? ›

For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.

Are CDs safe if the market crashes? ›

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

What is the biggest drawback of CDs? ›

The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers.

Why are CDs not a good investment? ›

CDs may not be worth it when interest rates are low. In these environments, conservative investors are often better off in other fixed-income securities, like municipal or corporate bonds, Conners says. Rosenstrock also recommends people consider the tax advantages of investing in fixed-income securities over CDs.

How much does a $50,000 CD make in a year? ›

A short-term CD could yield $2,625 per year (for a 1-year CD)
TermAPY (currentYield on $50,000
3 months5.26%$682.50
6 months5.00%$1,250
9 months5.55%$2,081
1 year4.90%$2,625
Feb 10, 2024

How much money should I put in a CD? ›

The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time. While that amount will be different for everyone, you should keep a few things in mind.

How much will a $500 CD make in 5 years? ›

This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.

How am I losing money on my CD? ›

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.

What is better to invest in than a CD? ›

However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses.

How long should you keep money in a CD? ›

Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.

How am I losing money on a CD? ›

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.

Are CDs safe if a bank fails? ›

The FDIC Covers CDs in the Event of Bank Failure

But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.

Do banks charge a fee for CDs? ›

CDs are safe, low-risk accounts offering competitive interest rates that remain fixed for the CD's term. Many banks and credit unions charge fees for opening and maintaining CD accounts, which can cut into your earnings. These include early withdrawal fees, monthly maintenance fees and broker fees.


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