Certificates of Deposits, more known as CDs, used to be a great option to have your money very safe, especially if you were willing to don’t have access to it for a certain period. However, lately, CDs are paying lower rates than they used to. This type of investment also doesn’t fit everyone’s needs, since you can’t access your money for the period it is invested. Thus, you may be looking for an investment alternative to CDs to gain more return and have easier access to your savings. In this article, you will be able to explore why CDs might not be the perfect fit for you and then read about the best alternatives for them.
There are a few reasons that might make CDs not the ideal investment for you. Of course, this will vary from person to person, but CDs don’t fit everyone’s financial needs. So here are the main reasons why it may be interesting for you to search for a new place to save and grow your money.
CDs never had the most appealing interest rates, but they had good ones for how safe this type of investment was. Nowadays, however, these rates are way lower than they used to be. If at one moment CDs reached an interest rate of 4%, now this is no longer a reality. In fact, since the beginning of 2020, rates were slashed to between 0% and 0.25%. CDs are considered safe-haven investments, but the low rates make this investment option less attractive.
With interest rates as low as 0% - 0.25%, CDs don’t even pay back the inflation rate. This means that with rates as low as they are currently, by leaving your savings in CDs, you are losing money in the long term. However, it is important to highlight that these rates can go up in the future.
Certificates of deposits work in a fixed period time frame that can go from a few months to a few years. For example, if you put your money in a one-year CD, you won’t be able to access it until the end of that established year. Therefore, if you have a problem with your money being locked for the fixed duration of the CD, this is not the option for you. That is because if you make an early withdrawal from the CD before the end of the agreed term, you will generally forfeit the earned interests, plus may be subject to fees and even penalties. This means you will have limited liquidity for the money invested on CDs. If an emergency or an unexpected investment opportunity arises, you won’t be able to pull out the money from your CDs without financial consequences.
When looking for an investment alternative to certificates of deposits, it is important to keep in mind that everything is relative to finance. Your profile and needs will be the best tools when choosing the ideal place to have your money safe and growing. This section will offer some interesting options of passive incoming investments with different formats, risk levels, interest rates. While reading, keep in mind your priorities and demands, so you can choose the alternative that best fits your financial profile.
If the low risk was the factor that made CDs appealing to you, this might be a good option. High-yielding online savings accounts are a safe move for your money. Most of these accounts offer some kind of insurance and tend to be considered low-risk investment alternatives. Attention to the fact that online savings accounts are a better option than traditional savings accounts due to their higher interest rates.
In a traditional brick-and-mortar bank, the interest rate you can earn with your savings account will be around 1% to 1.25% annually. In comparison, a digital savings account can offer rates from 1.80% to 2.25%, which is, on average, 10x higher. On top of that, many online savings accounts offer even higher interest rates than that. Some of these online platforms provide up to 10% of interest rates. This is possible because digital savings accounts don't have all expenses that come with a physical location and its employees. The lower expenses of online savings accounts also allow online platforms to charge you low to no fees, regardless of your account balance. In addition, many digital savings accounts have no minimum amount to open your account.
Besides the financial advantages, online savings accounts offer easy access through your phone, tablet, or computer with user-friendly platforms. Digital savings accounts have another great advantage over CDs, the higher liquidity. Even though most savings accounts do limit the number of withdrawals you can, they often let you take some money from the account if you need it. This makes this type of account an ideal place to have your emergency fund since you don’t have your money locked like in CDs. All these factors make online savings accounts a great alternative to CDs.
Bonds can be a great alternative to CDs, especially if the limited liquidity aspect doesn’t bother you. A bond is a loan taken by the government. Instead of going to a bank, the government gets the money from investors who bought its bonds. There are many types of bonds, but the only ones sold by the U.S. Treasury nowadays are I bonds. Like CDs, this is considered a low-risk type of investment due to its low volatility. Similar to CDs, bonds also have a maturity period, which has a minimum of 1 year and can go on for years, limiting your liquidity. In addition, there is a maximum you can invest in bonds, which can be a deal-breaker if you are looking to invest a very large amount of money. This maximum amount of investment in bonds can vary from the type of bond you are purchasing.
However, what positively differs bonds from certificates of deposits is their interest rates. Historically, bonds returned 3% to 5% on investments, which is a pretty good interest rate. Unfortunately, bonds have also suffered from a decline in yields along with the long decline in government bond yields. If you are in a 28% or higher federal income tax bracket and pay state taxes, you may want to consider investing in municipal bonds. These allow investors to earn federal and state tax-free income.
Opening a money market account can be a good alternative to CDs. The interest rates of money market accounts are not that much higher than CDs. Usually, a money market account offers the same interest rate as a one-to-two-year CD. But this type of account does offer you more flexibility with your money. Money market accounts tend to offer limited checking services. So you have more liquidity and it is easier to access your investment. Still, there is a maximum number of checks that you can write on your money market account per month. Usually, this number is between five to ten.
Money market accounts are also a relatively safe option since they are insured by the Federal Deposit Insurance Corporation (FDIC). This type of account often has other restrictions. One of them is a minimum open deposit, which is usually higher than a normal savings account would be. Many money market accounts have a minimum balance that must be kept, which if not followed, often has consequences. These consequences can go from penalty fees to only a lower interest rate. Because of that, before you open a money market account, pay attention to the fine print of your agreement and check the restrictions of the account.
For risk-averse investors, which would often go to CDs, stocks can sound like a risky option. But many stock opportunities pay steady and reliable dividends. The income rates of dividend stocks can be very appealing if compared to CDs, with yields between 2% and 5% per year on your original investment.
There is a special class of dividend-paying stocks called Dividend Aristocrats. This list comprises 53 large US companies that paid dividends to their investors and increased these dividends for 25 consecutive years or more. Of course, in case something extremely unexpected happens and the company does face financial problems, your money will be less safe than in CDs. But with Dividends Aristocrats, that is very unlikely. Stocks are usually very liquid, and you can decide to sell them and cash out to invest your money somewhere else. Thus, reliable dividend stocks can be a good alternative to CDs.
Not necessarily. Now, CDs may not be the best investment due to the extremely low-interest rates that don’t even outperform inflation. However, if you are extremely risk-averse or already retired, you don’t necessarily have to stop investing in CDs. For people who can commit to a fixed-term kind of investment, CDs can be a comfortable option. If your financial needs do fit CDs but you are bothered by the low return it offers, you can – and should – always place your money in more than one place. That is not only safer than putting all your eggs in the same basket, it can also enable you to fine-tune your strategy based on your risk-reward profile.