CDs Pay More Than Savings Accounts. Here's Why I Still Don't Use Them
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Certificates of deposit (CDs) look great on paper.
Right now, the average 1-year CD pays about four times more interest than the average savings account.
CDs are safe and predictable, and some earn 4.00% APY or more. But when you look at the tradeoffs, you might find they're not the best place for your money.
CDs crush most savings accounts -- but not the best ones
There's a huge gap between the best and worst savings accounts.
The average savings account interest rate is just 0.39%. But high-yield savings accounts earn around 3.30% to 4.00% APY -- enough to rival the best CD rates.
For example, the LendingClub LevelUp Savings account earns 4.00% APY with $250+ in monthly deposits. You might find a CD that pays a little more -- say, a 1-year CD with a 4.15% APY.
Here's how much a $20,000 deposit would earn in a year at those rates:
- LendingClub LevelUp Savings (at APY of 4.00%): $800
- 1-year CD with a 4.15% APY: $830
For me, that difference isn't worth locking my money up for a year.
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LendingClub LevelUp Savings
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- Competitive APY
- No fees
- Easy ATM access
- Unlimited number of external transfers (up to daily transaction limits)
- Requires you to make monthly deposits to earn the best APY
- ACH outbound transfers limited to $10,000 per day for some accounts
- No branch access; online only
The LendingClub LevelUp Savings account has a lot to offer. At the top of the list is its high APY, though you must deposit monthly to earn the best rate. Next is zero account fees, a strong and straightforward perk. Finally, you get a free ATM card, which you can use to withdraw from thousands of ATMs nationwide. Interested? You can open an account with $0.
Granted, a savings account's rate can change at any time, while a CD's rate is fixed. But I don't expect interest rates to plummet over the next year, nor do most experts.
I want my short-term savings to be available at all times
High-yield savings accounts are the best place for any money you may need on short notice.
- You can withdraw money at any time without penalty
- You can add funds whenever you want
- You can often link them to checking accounts for instant transfers and fast withdrawals
A CD can be a good choice if you're saving up for a specific goal within the next five years -- and you know you won't need the money sooner than that. Otherwise, you're just giving up flexibility for a tiny rate bump.
CDs don't grow fast enough for long-term goals
When it comes to big, long-term goals like retirement, my priority is high growth -- not safe, predictable returns.
That's why most of my extra cash goes into my 401(k) and IRA. That way, I can invest in the stock market. In the 13 years I've been investing, I've earned about 13% per year on average -- about three times today's best CD rates.
The stock market can be volatile, and losses are guaranteed to happen sometimes. But I'm still at least 20 years from retirement, so I have time to ride out the rough patches.
When CDs do make sense
CDs have their uses. They can make sense if:
- You're saving for a specific expense that's coming up within the next few years. Think home down payments, new cars, weddings, and so on.
- You want to keep some money locked up so you're not tempted to spend it.
- You're in or near retirement, so you need safety more than growth.
Otherwise, they may be an unhappy medium between savings accounts and investments.
Our Research Expert
James McClenathen is a full-time Managing Editor and Personal Finance Writer at Motley Fool Money, overseeing the production and quality of editorial content while also writing about credit cards, investing, and everyday money management. He has worked at The Motley Fool since 2012 and brings extensive experience as an editor, reporter, and finance expert. A graduate of the University of Michigan, James has spent more than a decade of his career helping readers make smarter financial decisions.
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