Should I Open a CD During the Coronavirus Crisis?

If you're unwilling to invest your savings right now, a CD might be a good choice.

The COVID-19 pandemic has brought life as we knew it to a full stop. We have to figure out a new way to do everyday activities, such as shopping, working, and managing our money. With millions of people out of work indefinitely and the stock markets more volatile than normal, you might be wondering what’s the best place for your money right now.

Unfortunately, there's no universal answer to that question; it depends on your personal financial situation. But one option that's worth considering is a certificate of deposit. Below, I explain how these accounts work and the pros and cons of opening one right now.

What is a certificate of deposit (CD)?

A CD is a type of savings account offered by most banks. These accounts are FDIC-insured, so you're protected for up to $250,000 in the event of bank failure. They also offer a higher APY than most savings accounts.

However, there’s a catch: You must agree to leave your money in the CD for a set number of months or years, which is known as the CD term. When the term ends, you can withdraw all of your initial investment plus interest. If you try to withdraw your money early, you'll usually pay a penalty equivalent to several months of interest. Longer terms keep your money tied up for more time, but they also pay higher APYs.

Advantages to opening a CD right now

Like savings account rates, CD rates have taken a hit since the COVID-19 pandemic broke out. But even at these new, lower rates, you can still earn more than 20 times the national average savings account APY of 0.08%. This makes CDs a great alternative for those who want to put their savings to work without exposing themselves to the volatility of the stock market. 

There's no risk of loss when you invest in a CD. You'll never get back less than your initial investment, and you could end up with a lot more. Plus, with traditional CDs, once you open your account, your rate is locked in and won't decrease. So if you open a CD right now and rates at your bank fall even further, you'll keep earning that higher rate.

Under normal circumstances, one of the key drawbacks of CDs is the penalty on early withdrawals. But many banks are waiving these penalties right now due to the unprecedented circumstances surrounding the coronavirus crisis. If you withdraw your money before the CD term ends, you won't end up earning as much interest as you would have if you'd waited out the full term, but you also won't have to worry about paying a fee on top of that. That's great news if you're concerned about your financial security over these next few months.

However, not all banks are waiving CD early withdrawal penalties. Check your bank's policies before you open an account if you think you may need to tap these funds ahead of schedule.

Disadvantages to opening a CD right now

A CD's guaranteed rate could be a disadvantage if rates climb again. You won't lose any money, but being locked in at that lower rate means you won't earn as much as you could be earning. 

This is always a risk with CDs, although admittedly, it seems bigger now with rates being so low. Some people combat this by creating a CD ladder, rather than investing all their savings into a single CD. A CD ladder involves dividing your savings into equal pieces and then investing those pieces into CDs of differing lengths. For example, if you'd like to invest $5,000, you might put $1,000 in a one-year CD, another $1,000 in a two-year CD, another in a three-year CD, another in a four-year CD, and the final chunk in a five-year CD.

When the one-year CD term ends, you can invest it in a new five-year CD, and when the two-year CD term ends the next year, you do the same thing. This way, some of your money is available to you every year so you can take advantage of higher rates when they're available.

Another thing to keep in mind is that banks will reinstate early withdrawal penalties whenever we start to recover from this crisis. So if you open a CD thinking you can withdraw the money penalty-free in a few months if you need to, you could be disappointed. Even if you are still able to withdraw your money without a penalty, you usually have to withdraw all your funds at once. You can't just take what you need and leave the rest to keep earning interest. 

You also can't quickly access money in a CD at any time. These accounts don't come with checks or debit cards, because you aren't supposed to be withdrawing money from them. So if you do need to get your funds out, you'll have to transfer them to your savings or checking account first. That can take a couple of days, unless you have all of your accounts with the same bank.

The bottom line

Whether it's smart to open a CD right now largely comes down to when you expect to need your money. Even though some banks are waiving penalties right now, it's best not to open a CD if you anticipate needing the funds before the CD term is up. Go with a high-yield savings account instead. These accounts also offer high APYs, and you can access your money more easily.

If you don't expect to use your savings anytime soon, a CD can be a smart way to earn a profit on them. But consider building a CD ladder rather than sinking all your money into a single CD. This way, if rates increase, you won't be locked in at the current low rate for years.