Is a certificate of deposit right for you? Surprising benefits revealed
Certificates of deposit (CDs) are excellent savings vehicles - in the right circumstances.
There are many benefits to CDs, but they also have some limitations that savers should consider before investing in them. They are a secure way to boost your personal savings, and they typically offer much higher CD interest rates than a standard savings account. Unlike a traditional savings account, which allows ongoing deposits and easier access to funds, CDs require a fixed deposit for a set term with limited liquidity. CDs are considered lower risk compared to other investment options, as they are offered by federally insured banks, providing government-backed insurance protection for your deposits. Let’s take a closer look at the benefits of investing in CDs.
How does a certificate of deposit work?
Certificates of deposit are fixed-term investments, meaning the funds deposited are held for a set duration known as the CD's term—a fixed period during which your money remains in the account. In return, the bank pays you back with a tidy sum of earned interest at a fixed interest rate when the CD matures.
Key features of CDs
Certificates of deposit offer guaranteed returns, little to no risk, and flexible terms so you can invest your money for short periods, such as three to nine months, or longer terms like two to five years, depending on your savings strategy. CDs are suitable for savers with varying risk tolerance, as they provide a secure option for those who prefer stability over higher-risk investments. CDs don’t have any maintenance fees, but you will be penalized if you have to take your money out before the CD reaches the end of its term, which is also called its maturity date. Withdrawing funds prematurely can result in penalties that may impact your savings goals.
How interest is calculated and compounded
Interest on CDs is compounded daily or monthly. Most CDs compound interest monthly, meaning your annualized interest rate is divided by 12 months, and your interest rate is applied to your principal balance, increasing the interest earned over time. With daily compounding, your interest rate is divided by approximately 365 days and applied to your balance. As your CD’s balance grows, the amount of compounded interest and the total interest earned also rise. The interest payment is typically received at maturity or at specified intervals, providing predictable income from your CD investment.
Certificate of deposit vs. savings account
With a standard savings account you can make a limited number of transactions each month (often set at six). These accounts are easily accessible, allowing you to withdraw funds quickly when needed. Accounts may have minimum balance requirements to avoid maintenance fees. You’ll earn a paltry sum in interest - the national average for August of 2025 was just .39 percent, according to the Federal Deposit Insurance Corporation (FDIC).
Current CD rates
8 surprising benefits of a certificate of deposit
As we mentioned, CDs can be an excellent option for savers looking for a reliable financial product. Choosing the right CD is important to ensure it fits your needs and stands out among other financial products available. It's also essential to align your CD selection with your specific financial goals, whether you're saving for a short-term purchase or long-term objectives like retirement. Here are eight benefits of investing in CDs to consider:
1. Fixed and predictable returns
Perhaps the most important benefit of certificates of deposit is that they offer a predictable and guaranteed return. For example, if you invest $10,000 in a 4% fixed-rate CD with a two-year term length, and interest is compounded monthly, you’ll earn $831 in interest. Interest rates are fixed, so you have a dependable and stable return over the length of the CD.
2. Higher interest rates than savings accounts
Since they pay very little interest, savings accounts should be used to safely store funds you may need to access in the near term. CDs, on the other hand, are a good place to park money you don’t need to access since you can earn a decent amount of interest, especially when comparing current CD rates across different financial institutions. Many credit unions and banks – especially online financial institutions – offer interest rates around 4% on both short- and long-term certificates of deposit, though you should be aware of any minimum deposit requirements.
3. FDIC or NCUA insurance protection
CDs are one of the safest investment vehicles available to savers. Certificates of deposit—called share certificates at credit unions—are guaranteed up to $250,000 by the FDIC, an independent government agency, or the National Credit Union Administration (NCUA), which is also an independent government agency. That limit is doubled for joint account holders.
4. Helps prevent impulsive spending
You won’t be able to access the funds invested in a CD without incurring an early withdrawal penalty, so it’s important to leave your money untouched for the full term to maximize your returns. CDs can be a great hedge against impulsive spending.
5. Flexible term options
With CDs, savers can choose from a variety of CD term lengths, ranging from as short as 30 days to as long as seven years, depending on what your financial institution offers. When selecting a CD, it's important to understand the agreed-upon term, which is the mutually accepted duration you commit to leave your funds deposited. Flexible term limits allow you to craft a multi-layered savings strategy that incorporates both near- and long-term goals.
6. No market risk exposure
Countless fortunes have been made and lost in public equity markets, as other investments are often subject to market fluctuations and economic downturns. CDs don’t follow bull or bear stock market runs, though, and unlike other investments, their fixed interest rates insulate CDs from market volatility.
7. Interest payout options
CD accounts typically pay out all accrued interest when the CD matures. You can cash out your funds or roll them over into a new CD. Some CDs may allow you to cash out interest on a regular basis, such as each month, quarter, semi-annually, or annually.
8. Useful for goal-based saving
Short-term CDs allow your funds to earn interest without limiting liquidity, making them a practical option for saving toward a specific goal such as a down payment. Longer-term CDs allow your funds to experience reliable growth without incurring any risk or exposure to downturns in the national economy. Medium-term CDs of one to three years strike a balance between the two savings strategies.
Understanding certificate of deposit pros and cons
We’ve highlighted many of the potential benefits of investing in certificates of deposit, but it's important to consider the potential gains you might miss out on by locking in your money, especially when comparing CDs to other savings options or even to other CDs with different terms. Let’s look at some of their limitations.
Early withdrawal penalties
Early withdrawal means taking money out of your CD before it reaches its maturity date. In most cases, banks and credit unions impose a penalty for early withdrawal, unless you have a no-penalty cd, which allows you to access your funds without incurring a penalty.
Penalties are levied in different ways according to your financial institution’s policy and CD terms. Withdrawing funds early from a traditional CD may result in being assessed a few months of earned interest, or you might face a penalty equal to a percentage of the interest your CD would have earned through its maturity date. Some banks use a combination method.
Limited liquidity
CDs are fixed-term investments. Your money will be tied up for the length of the CD, which can limit your ability to access cash in emergencies. If you think you might need to access your money, a high-yield savings account or a money market account may be a wiser choice. Both options offer greater liquidity and competitive interest rates, providing flexible and secure alternatives to certificates of deposit.
Inflation risk
CDs are notable for predictable returns and low risk, but they are still subject to certain risks, such as interest rate risk and inflation risk—especially for long-term investments. If the rate of return on your CD does not keep pace with inflation, you’ll lose purchasing power.
Opportunity cost if rates rise
Since CD interest rates are fixed, investors could miss out on a greater yield if interest rates rise. As an alternative, some savers may consider a variable-rate CD or a bump-up CD, which offer more flexibility in rising rate environments. Interest rates are expected to decline through the fourth quarter of 2025 and remain stable through most of 2026; however, choosing products with variable interest rates or utilizing bump-up CDs can be a strategy to benefit if rates increase unexpectedly.
3 tips to get the most out of your CD
CDs aren’t one-size-fits-all. Before opening a certificate of deposit, it’s important to evaluate your financial situation to ensure you can leave funds untouched for the term. Banks and credit unions offer a wide range of deposit accounts, including CDs with various term options and interest rates depending on their financial needs, strategies, and economic forecasts. These three tips can help you maximize your CD investments.
Shop around for the best rates
When it comes to investing in CDs, it pays to shop around for the highest rates across different financial institutions, since you could earn a greater yield. Online financial institutions tend to offer some of the highest interest rates on both short- and long-term CDs, but that’s not always the case. Also, it’s important to note that when you buy a CD from a local or regional bank, that financial institution is able to put your money to work within your community by funding loans to other members.
Avoid CDs with harsh withdrawal penalties
Banks depend on CD investments for liquidity and long-term financial planning. Withdrawing funds prematurely from a CD typically results in early withdrawal penalties, which are assessed as a means to deter savers from prematurely pulling their funds out of CDs. Early withdrawal penalties can vary, but generally, you’ll want to look for CDs that only enforce a few months of missed interest or those that have a cap on the amount you’ll pay for an early withdrawal penalty.
Consider building a CD ladder
A CD ladder uses many CDs with varying term lengths and amounts as a strategy to diversify your savings. By staggering maturity dates across each CD account, you increase liquidity while staying on top of the highest interest rates available and potentially maximizing CD yields. As the federal fund rate and federal funds rate change, the interest rates offered on new CDs can fluctuate, impacting your returns. You can continue to roll funds over into new CDs as the different terms mature to meet both near- and long-term savings goals, using a mix of shorter-term CDs for flexibility and longer-term CDs for higher rates.
Ready to boost your personal savings?
Certificates of deposit are popular savings vehicles because they are flexible, predictable, pose little risk, and they have much better interest rates than traditional savings accounts. CDs can be a buffer from impulsive spending, and you can build a CD ladder of varying terms to maximize yield for both short- and long-term savings strategies.
CDs aren't for everyone, though. They can limit your liquidity, and you'll be penalized if you have to access your funds before the CD matures. Savers may find that the many certificate of deposit advantages outweigh their minor drawbacks.
