Is a 3-Month CD Even Worth It?

There's a reason certificates of deposit, or CDs, have been so popular in recent months. On the heels of the Federal Reserve's string of interest rate hikes, CD rates have been quite favorable.

Granted, the same can be said for savings account rates. But with a savings account, your interest rate is not guaranteed -- it can rise or fall with market conditions.

With a CD, the rate you get at the time you lock your money away is the rate you're guaranteed throughout your CD's term. And often, CD rates are higher than savings account rates, even if only slightly.

Many banks offer CDs in a variety of terms. And often, the shortest-term CD you'll find is a 6-month CD.

But some banks do offer a 3-month CD. And at first, you might think that it doesn't make sense to open a CD with such a short time frame. But actually, a 3-month CD could be pretty useful to have, provided you can find one.

When you're hesitant to make a commitment

While CDs often offer the upside of higher interest rates than savings accounts, and they give you the benefit of a guaranteed interest rate, there's a downside -- you have to commit to keeping your money where it is throughout your CD's term. If you don't, you risk a penalty for taking an early withdrawal, the amount of which will depend on your bank's rules and your CD's term. The nice thing about opening a 3-month CD is that you're only making a limited-time commitment.

Let's say you're trying to save up a down payment for a home. You're not sure exactly when you'll be in a position to buy, and you don't expect to be making an offer anytime really soon. However, you may be able to buy a home in six months or a year.

In that case, opening a 3-month CD could make a lot of sense. You could score a higher interest rate on your money for a few months and know that rate is locked in. At the same time, your cash would free up in time for when you need it.

When you're trying to ladder your CDs

Another benefit to opening a 3-month CD is that it might fit in well with your laddering strategy. With a CD ladder, instead of putting all of your money into a single CD, you set up multiple CDs of varying terms so that you have money freeing up at different intervals. This gives you more flexibility and could reduce your chances of getting hit with an early withdrawal penalty.

So let's say you have $10,000 to put into CDs. If you find a 3-month CD option, you could conceivably split that sum into four and then open $2,500 CDs with terms of three months, six months, nine months, and 12 months. This way, some of your money becomes available to you every three months.

An option that may be worth pursuing

You might think that a 3-month CD isn't worth opening because you're only benefiting from a higher interest rate, or interest rate stability, for a short period. But clearly, there can be advantages to a really short CD term. So you may want to open one of these CDs -- that is, if you can find one.

Many banks don't offer CDs with such a short term, but some do. Alliant Credit Union, for example, has a 3-month CD, and if you do your research, you'll likely find more banks with that same offering. Make sure to compare your options no matter what, because even though you're only talking about three months of interest, you might as well earn as much on your money as you can.