Many CDs offer higher returns than traditional savings accounts, however they may not offer as competitive of returns as other investments. You typically have to keep your money invested for a set period of time or pay an early withdrawal penalty. If you’re looking for a savings or investment option that offers similar benefits to CDs in terms of security and returns, consider the pros and cons of these six alternatives. They include other assets like bonds, TIPS, and dividend stocks, as well as financial strategies like paying down debt, using high-yield savings accounts, and buying life insurance.
Are CDs a Good Investment?
Whether or not a CD is a good investment depends on your goals and personal financial situation. Investors tend to seek out three main benefits from their investments, David Frederick, senior vice president at First Bank Wealth Management, told The Balance in an email. Those are liquidity (accessibility), little to no risk, and a good return. But no investment provides all three benefits. “The CD was meant to offer a good upside return with relatively no downside risk, but at the cost of liquidity of funds,” Frederick said. The tradeoff for earning a higher interest rate is keeping your funds deposited. Generally, the longer your money stays in the CD, the higher the return you can earn. Terms range from about as short as one month to 10 years or longer. On the plus side, you’re essentially guaranteed not to lose any principal. If you open a CD account through a federally insured bank, your money is protected by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per bank. Similarly, CDs purchased from credit unions are backed by the National Credit Union Administration (NCUA) for the same amount.
What Rate Do CDs Earn?
CD rates tend to increase along with the term length. Usually, CD rates on CDs with terms of six months or more are more competitive than interest rates on savings accounts. For example, in 2022, 1-year CD rates were about 1%, 2-year CD rates ranged from about 1.3% to 1.4%, and rates on 10-year CDs were about 1.25% to 1.5%, according to The Balance research. In contrast, the best high-yield savings account rates were about 0.65% to 0.75%.
Alternatives to CDs
When considering CD alternatives, think about assets that have comparable benefits of lower risk and steady returns like bonds and dividend stocks. Also consider how you can use your money toward a near-guaranteed return with little or no downside risk, Frederick said.
Bonds
A bond is a type of debt security that pays a fixed interest for a certain amount of time. In exchange, you are lending money to the issuer, such as a government or a corporation, that will also make regular payments toward that debt. Different types of bonds have different risk levels, with higher-yielding bonds typically carrying higher risk. Still, bonds are considered relatively low-risk compared to more volatile stocks. Types of bonds include:
U.S. Treasury bondsMunicipal or “muni” bondsCorporate bondsHigh-yield bonds (junk bonds)
Treasury Inflation-Protected Securities (TIPS)
Like CDs, bonds may not be ideal when inflation is on the rise, especially if the return is not keeping pace with the rate of price rises. “Moreover, this inflation-adjusted return comes from the U.S. Treasury, considered one of the safest investments in the world,” Frederick said.
Dividend Stocks
If you’re comfortable with taking on more risk, you may want to consider dividend stocks. Many major companies share their profits with shareholders in the form of dividends, which are typically paid on a set schedule, although companies can issue them at any time. Dividends can yield significantly higher returns than CDs. Of course, they also carry a higher risk that you could lose part of your principal if the stock value declines.
Pay Down High-Interest Debt
Putting your extra funds toward your debt can help your bottom line and just as well as investing in an asset for gains. That’s because you can save substantially on interest. For example, if you have $10,000 in savings and you put it in a 1-year CD that earns 1% APY, you’ll have earned $100 at the end of the term. Now, let’s say that you also have a $10,000 credit card balance with a 15% APR and monthly payments of $250, and you use your $10,000 to pay off your credit card. You would save a total of $3,738 in interest payments, including $816 in interest for the first year.
Stash Savings in High-Yield Bank Accounts
A high-yield savings account can be a secure place to store your emergency fund or other savings while earning interest. Like CDs, savings accounts usually have FDIC protection for up to $250,000 per account.
Buy Life Insurance
Life insurance is primarily a tool to financially protect loved ones if you die. Permanent life insurance policies, however, also have a cash value component that you can access while you’re alive. The cash value portion of the policy earns interest based on a rate set by the insurer or the market, depending on the policy type. “Both whole life and indexed universal life insurance can provide an upside while limiting downside, at the expense of locking up the money for a period of time stated in the insurance contract,” Frederick said. Whole life insurance products are not a pure investment, since premium payments also go toward the death benefit and administrative costs, Frederick said. “However, for someone who wants both to find an alternative to CDs and to provide a death benefit to his or her family, there is no going wrong in pursuing permanent life insurance,” he said.
The Bottom Line
If you’re looking for a safe place to store your savings and earn a small amount of interest, a CD may provide what you need. However, consider alternatives that can either provide more liquidity or offer better rates and could be more suited for your needs, depending on your financial goals. You can work with a financial advisor toward establishing a wealth plan with investments suited to your situation, which may include CDs or other assets with similar benefits.
