If you're looking for places to store your cash for short-term saving goals, certificate of deposits are a wise option to consider. They can help you earn a rate of return that outpaces inflation and they're risk-free.
Short-term CDs like one-year ones offer you a chance to save for short-term savings goals. If you have a trip you want to save for or a large purchases, they can help you reach them quickly.
Our tool, in partnership with Bankrate, will let you search for a good rate on an account that's right for you.
Why open a CD account?
A CD, or certificate of deposit, is a type of investment account that holds a fixed amount of money for a fixed term — which can be anywhere from one to five years. The annual percentage yield (APY) on CD accounts is higher than rates for traditional savings accounts, helping you maximize your savings with minimal effort.
However, unlike typical savings accounts, you won't be able to withdraw cash from your account before the CD matures. If you do so, you'll have to pay an early withdrawal fee that can offset any interest you may have earned on the account (unless you open a no-penalty CD).
For this reason, CDs aren’t a great place to park cash you plan on spending in the coming months, nor do they make good emergency funds. But if you're saving for an upcoming event or large purchase, like a car or wedding, a CD can be a great savings vehicle.
And because your cash is essentially locked away in a CD account, your savings will earn a fixed APY — an added benefit if the Federal Reserve decides to drop rates in the future.
One of the best reasons to open a CD account is that it’s one of the safest places you can save your cash. This is because most CD accounts are FDIC- or NCUA-insured.
The difference depends on whether you open an account with a bank (overseen by the FDIC) or credit union (regulated by NCUA). If your bank or credit union is faced with any financial trouble or closes, your deposits will be insured up to $250,000 per account (and up to $250,000 per person in a joint account).
You can even use the FDIC BankFind tool to check whether a bank is federally insured.
Opening a CD is also a great option if you’re looking for a guaranteed rate of return on your savings. While CDs offer comparatively lower returns compared to higher-risk investment options, like stocks or ETFs, they’re a good choice if you value a fixed, predictable and safe return on your money.
Here are some 1-year CDs with top rates
Pros and cons of CDs
Pros
- CDs offer a risk-free to save with guaranteed returns on your deposit
- Fixed rates on CDs mean that even if interest rates fall, the APY on your account will remain consistent
- Most CD accounts from banks and credit unions are federally insured for up to $250,000
- Since you can only withdraw funds when your CD account matures, you won't be tempted to spend your money elsewhere
Cons
- No liquidity; Accessing funds from a CD account isn't as easy as with a savings account. And if you need to withdraw funds from a CD account before the maturity date, you'll be charged a fee, which will likely offset any interest earned
- Money cannot be added to a CD once it has been opened
- Fixed rates on CDs also mean that if rates increase, you'll miss out on potential earnings
- CDs have a lower earnings potential compared to stocks or mutual funds, you can see options below:
Bottom line
Short-term CDs give you the best of both worlds: You'll earn a healthy rate of return and you have the flexibility to take advantage of any better investment opportunities in the near future. Keep in mind CDs work best when viewed as a park your money there and forget about it type of vehicle.
