Are CDs Obsolete?

Posted by Jill on June 28, 2010

Once upon a time, Certificates of Deposit (CDs) were a great way to put away money for a fixed period of time. A CD ladder could help you get the overall best interest rate by locking in funds for longer amounts of time while still giving you access to portions of your cash every month or year. I used to use CDs as a way of earning a higher interest rate than I could earn on the money sitting in my savings accounts. But as interest rates have dropped, CD rates have plummeted as well. The last two times I’ve had a CD mature, I’ve simply left the funds in an online savings account.

CDs Today

INGDirect is perhaps the best known online savings bank. It boasts an interest rate of 1.10% for its high-yield savings account. Contrast this with CDs – for the “privilege” of locking your money away for 6 or 9 months, ING will pay you .75% – a whopping .35% less than keeping your money completely liquid and accessible! 12- and 18-month term CDs pay 1%, while 24- and 30-month CDs earn you the same 1.10% as the savings account. The only way to get a higher rate is to choose a 36-month CD, earning a rate of 1.25%. But of course, interest rates will almost certainly be higher by then and you’ll have lost out on the opportunity for more interest in either a CD with better terms or a higher-yielding savings account.

Best CD Rates

Our CD rate tracker paints a similar picture – the highest rate you can get for a 1-year CD is 1.55%, and many banks are paying less. Compare this with SmartyPig, where you can earn 2.15% if your account is worth less than $50,000, and you may start to question, as I did, whether CDs make sense in the current economic environment.

Only 5-year CDs are paying a truly desirable rate of up to 2.99% at Ally Bank. Again, to earn this rate you must be willing to lock your funds away until 2015, paying a penalty if you decide to take them out earlier, and missing out on any interest rate increases in the meantime.

To get one of the best CD rates, check out a Unique CD Strategy to Lock in Higher Rates using the Ally Bank CD.

When CDs Make Sense

CDs still make sense for people who need a more disciplined approach to saving money – if you honestly have a hard time leaving your savings account untouched, locking up the funds in a CD is a good way to limit the temptation.

CDs may also make sense if you believe interest rates will fall – locking in a higher rate now will give you a better long-term return.

CD Alternatives

The average saver/investor probably won’t find it beneficial to lock your money into a CD at today’s low rates. Instead, consider keeping savings and the cash portion of your investing portfolio in savings bonds or at a bank like SmartyPig (currently paying 2.15%) or Sallie Mae (currently paying 1.40%).

What do you think – will you continue to buy CDs in the current interest rate environment? Tell us why or why not in the comments!

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Comments to Are CDs Obsolete?

  1. I’m glad you wrote about this, as I’ve made similar observations recently. I plan to keep my medium-term savings $$ in my online Money Market account until CD rates increase…or other products are offered.



  2. I won’t lock my money in a CD with the economy the way it is now. I have thought of trying SmartyPig. There are not to many options at this time.


  3. You’re right in that CDs help discipline a beginning saver, and the very short ones (7-30 days) are ok for home buyers waiting to close. Otherwise CDs are a waste of opportunity, and looked down upon from passive portfolio managers even in tough times. My semi-liquid Summer acct at SchoolsFirst FCU in Orange County pays 4%, and I’m sure other Holiday accts at credit unions pay more than bank CDs.

    Don’t sweat the small stuff though–time is better spent reducing expenses and increasing investments!


  4. In fairness to Ally, their shorter term plans are at about 1.5%, and they give you the option to grab a higher rate on the same CD if the rates go up in the future.

    But I agree with the general premise.

    One other thing to consider is instead of buying bonds directly and setting up bond ladders which can be somewhat complicated and time consuming, are bond funds. Fidelity has a great selection of these with varying risk profiles. The benefit here is that the money is quite liquid yet generally fairly safe (especially in the low risk ones). I invested in some government bond funds earlier this year instead of a cd and have seen very good returns thus far, even with the latest slowdown of the market.

    Follow me on twitter: xmascarol7

    Bryan C

    • Thanks Bryan. Maybe we’ll explore bond funds in a future post.


  5. Until they pay more than 2%, CDs are useless. So are savings account. Neither will make you much money. A CD is nothing more than a savings account anyway. Factor in a 4% annual inflation rate, and taxes, and you are losing money if you use CDs.

    Financial bondage

    • Thanks for your input! I definitely see your point about inflation, but that’s one of the main “risks” of keeping savings in cash, which is otherwise risk-free. It’s not ideal for all of your investments, but certainly an emergency fund and may 5% or so of your investment portfolio should be in cash or cash equivalents. Stocks/bonds have liquidity issues as well as a risk of losing some or all of your money. The risk is small, especially in a diversified portfolio, but it’s there.


    • Using today’s sub-2% CD rates and a 4% annual inflation rate doesn’t quite make sense. In 2009, deflation took place for 8 months.

      Joshua Townsend

  6. Good post. I’ve always laughed when I login to my Ally savings account and see that the Cd’s are only .1% higher or something.

    Even with $10,000 in a CD I’d only make $13 extra dollars over the course of a year. That is hardly worth the sacrifice in liquidity.

    The Best Money Blog

  7. Thanks everyone for the input. Be sure to check out Madison’s post on a way to get around some of the low-interest issues:


  8. This is a great post! I think CDs are obsolete in times like this where our economy is so unstable. You can’t find a high enough rate to make putting your money in a CD worth it. Making $13 in a year on $10,000 doesn’t even pay for inflation.


  9. I’ve got 5 year CDs making 4% at USAA.

    It’s not dead at all. In fact, CDs are alive and kicking!

    Financial Samurai

    • Yeah, like Sam mentioned, I also have a 5-year CD at 4% with Citibank. It wasn’t offered online – sometimes you need to go to your local branch to get a better deal.


  10. Maybe your readers should look further a field. The Australian Government (employment rate 5%, only g20 nation to not have a recession, smallest debt to gdp ratio of the g20) is offering bonds at 6.25%. The financial sun doesn’t rise and set in the states or BRICK nations

    Benjamin Bankruptcy

  11. I recently got a 5 month CD for 5%. Was this a bad idea?


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