Should You Open a CD With Your Stimulus Check?

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If you're not sure what to do with your stimulus check, why not invest in something that can benefit your future?

By the time the Internal Revenue Service (IRS) distributes all of the stimulus checks, roughly 140 million Americans will have received one. As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, each eligible adult is scheduled to receive a check for up to $1,200, with an extra $500 per qualifying child. And there may be a second stimulus check in the pipeline.

If you have received a stimulus check (or are expecting one) and do not already have a plan for what to do with it, opening a certificate of deposit (CD) could be a safe option.

Is a CD a good choice right now? 

The allure of CDs is two-fold: Your savings can grow faster due to the interest earned, and the money is federally protected. Another attractive feature of CDs is that they are customizable. Unless the account requires a minimum deposit, you get to decide how much to put in. 

When you sign up for a CD, you are essentially agreeing to leave your money with that bank or other financial institution for a set period of time, typically referred to as the "term" or "duration." In return, the financial institution agrees to pay you a higher interest rate than it typically pays on savings accounts.

Normally you would have to pay a fee to withdraw money from a CD early, but the FDIC is encouraging banks to waive fees for customers impacted by coronavirus-related issues, including illness and job layoffs.  

How much interest you earn is determined by the amount of money you deposit and how long you agree to leave it there. In general, the more money you put into a CD and the longer the term, the higher the interest rate paid.

Why it might be a good idea 

CDs are popular due to the number of benefits they offer, including:

  • FDIC insurance: Dollar for dollar, including principal and interest earned, CDs are insured by the FDIC for up to $250,000 for single account holders and $500,000 for joint accounts. 
  • The interest rate is usually fixed: Depending on the type of CD you open, the interest rate will remain the same throughout the term, so you'll know how much you can expect to earn.
  • Interest is compounded: Compound interest means that, periodically, the interest earned on your CD is added to the principal (unless you withdraw any money prior to maturity). Rolling interest into the principal means you'll earn interest on your interest.
  • The duration can be tailored: You get to determine how long you are comfortable leaving your money in a CD. It can be as little as 21 days or as long as 10 years. The key is to choose a term that works for you.
  • They can be part of an investment strategy: A CD ladder is a strategy that allows you to invest in CDs of increasing lengths. For example, you may have three CDs -- one year, 18 months, and two years. Staggering them allows you access to part of your money on a regular basis. Once one CD matures, reinvest it in another, longer CD to keep the ladder growing. If you are interested in laddering, look for CDs with no required minimum deposits, and split your stimulus check to open several.

Why it might not be a good idea

Nothing is perfect, and CDs do have disadvantages, including:

  • Limited flexibility: Depending on whether or not your financial institution waives penalties, it may cost you to withdraw money before the term is up. If your bank does charge a penalty, it will work differently for each financial institution. Some banks will take back interest you have earned to that point, and others will take funds from your original deposit. It's important to consider how long you're willing to tie your money up during these uncertain times. 
  • Rates are low: Your COVID-19 stimulus check is arriving at a time when interest rates on savings accounts and CDs are low. These rates are tied to the federal fund rate, which is low because the Fed is doing everything within its power to stimulate the economy. That means you may not want to tie your money up in a fixed-rate CD for a long period of time as you'll be stuck with that low rate. One way around it today is to get into the shortest-term CD you can find and reinvest your money when rates are higher.
  • Inflation can eat away at any potential profit: Let's say you invest in a CD paying 1.5% interest, but inflation rises by nearly 2% over the time you hold the CD. If inflation surpasses the interest you earn, you have lost money in real terms. 

Things to consider before opening a CD with your stimulus check

To be sure that you are doing the right thing for your situation, ask yourself these questions before you put your stimulus check into a CD:

  • When will I need this money? Think about what you are saving for. If it is something years in the future -- like a new car or down payment on a house -- you can take advantage of the higher interest rate that accompanies a longer-term CD. On the other hand, if you expect to need the funds soon, you might opt for a short-term CD. If you don't have an emergency fund put aside, why not build financial security by instead putting your stimulus check into a money market account (MMA) or high-interest savings account? 
  • Can I leave the money alone? Only you know how disciplined you are when it comes to your finances. To reap the full benefits of a CD, make sure you are committed to leaving it until maturity.
  • How comfortable am I with risks? If you don't like taking risks, you may prefer to commit your cash to a CD for a set period of time, even though interest rates are low. You'll have the security of knowing it is safe and be able to collect some interest. 
  • What are my options? If investing only makes sense when the rates are higher, consider tucking your money away in a long-term investment. Nothing beats the historical return on the stock market. Or, if you would rather, open a Roth IRA, or increase your contribution to an employee-sponsored 401(k) plan. You could also put the money into your health savings account (HSA). 

Unless you have a pressing need for your stimulus check, the smartest move is always to build wealth. Weigh up the following three factors: security, timescale, and interest. If you need the money in the medium term and want the certainty of a steady return, even if it's a relatively low one, a safe financial haven like a CD might be a good route. Check out our list of the best CD rates to find the right one for you.

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