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Are CDs Obsolete?

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 [1] 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 [2] 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 [3] 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 [4], 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 [5]. 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 [6] 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 [7] or at a bank like SmartyPig [4] (currently paying 2.15%) or Sallie Mae [8] (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!