My credit union is holding a special offer for a 2.25% APY Certificate Account right now, and I was considering opening one at $500.

I ran it against an online calculator, and I was surprised at how little I'd actually make. After 36 months (the terms of the CD) I'd have a little less than $35 in accrued interest.

I realize that the point of saving is not to make money, but to keep money secure for the future, but in my position, I've got $6000 left on my student loans at a 5.8% interest rate, and I lose almost as much in that a month - I feel like it'd be wiser to just increase the amount I'm putting into that, or just keep the money in a more liquid form so that I can use it for personal expenses.

Am I overlooking some important advantage to having a CD? I've already got a savings account set up for emergencies, so I'm having trouble seeing any major advantage to me buying into an account like that.

  • 13
    If you're surprised at how little that CD would yield, wait until you calculate how little that $500 will yield sitting in your emergency fund. Savings accounts are at like 0.05% APY right now, so after 36 months you'd have two extra quarters to rub together, and one to spend on a stick of gum. Jun 7, 2017 at 9:01
  • 6
    Depends -- if you go with Ally you can get 1.00% APY on a savings account.
    – apscience
    Jun 7, 2017 at 13:04

5 Answers 5


If you've already got emergency savings sufficient for your needs, I agree that you'd be better served by sending that $500 to your student loan(s).

I, personally, house the bulk of my emergency savings in CDs because I'm not planning to touch it and it yields a little better than a vanilla savings account.

To address the comment about liquidity. In addition to my emergency savings I keep plain vanilla savings accounts for miscellaenous sudden expenses. To me "emergency" means lost job, not new water pump for my car; I have other budgeted savings for that but would spend it on a credit card and reimburse myself anyway so liquidity there isn't even that important.

The 18 month CDs I use are barely less liquid than vanilla savings and the penalty is just a couple months of the accrued interest. When you compare a possible early distribution penalty against the years of increased yield you're likely to come out ahead after years of never touching your emergency savings, unless you're budgeted such that a car insurance deductible is an emergency expense.

Emergency funds should be guaranteed and non-volatile. If I lose my job, 90 days of accrued interest isn't a hindrance to breaking open some of my CDs, and the process isn't so daunting that I'd meaningfully harm my finances.

Liquidity in 2017 and liquidity in whatever year a text book was initially written are two totally different animals. My "very illiquid" brokerage account funds are only one transaction and 3 settlement days less liquid than my "very liquid" savings account. There's no call the bank, sell the security, wait for it to clear, my brokerage cuts a check, mail the check, cash the check, etc. I can go from Apple stock on Monday to cash in my hand on like Thursday. On the web portal for the bank that holds my CDs I can instantly transfer the funds from a CD to my checking account there net of a negligible penalty for early distribution. To call CDs illiquid in 2017 is silly.

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    In case you lose your job or have a major house or car issue that's not covered by insurance. Emergency funds should be liquid. Jun 7, 2017 at 14:35
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    @AbraCadaver CDs are fairly liquid. The early withdrawal penalty is usually some amount of interest, maybe around 6 months worth. Therefore if you store the bulk (read: not all) of your emergency fund in CDs there isnt much risk and the interest is better. Furthermore, if you cycle the maturity dates you are protected against long term unemployment or similar long term need to withdraw from the fund.
    – Matt
    Jun 7, 2017 at 16:09
  • I didn't know about the low penalty. I had never considered investing in one because the interest was so low. Jun 7, 2017 at 17:32
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    As explained perfectly by Quid, CDs are perfectly liquid.
    – Fattie
    Jun 7, 2017 at 18:02
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    @Arluin as you concluded, in those cases, there's no advantage to having quicker access to "emergency" savings since you can't access the money in your savings account. So, my point is, liquidity doesn't seem like a good enough argument to advocate for keeping money in savings versus keeping money in a CD. There may be other reasons - if you use a local bank and lose ATM cards, account numbers, you can still go into a branch, identify yourself, and have your account (and thus your money) located quickly - but liquidity doesn't stand on it's own.
    – iheanyi
    Jun 8, 2017 at 19:03

One reason why you can get a better rate with a CD compared to a regular savings account is that they lock you into that account for the period of the CD. You can get out of the CD early, but you will forfeit some of the interest. You also generally can't move a portion of the money out of the CD, you have to pull it all out, and then start a new CD with the portion you don't spend. You have to check the terms and conditions for that particular CD.

Some people use them to hold their emergency fund. This is the 3-6 months of expenses you set aside in case of a major problem such as a medical emergency or a job loss. The rate is better than the regular savings account, so it can come closer to inflation. The goal is preservation of capital, not investing for the future.

So if you understand the risks, and the CD is backed with the same guarantees as the savings account, then it is a viable way to store some or all of the emergency fund.


The benefit, as other answers have mentioned, is higher interest rates than are available compared to other comparable options. My bank keeps spamming me with offers for a sub 1% APR savings account that only requires a $10,000 balance, for example. While CDs and similar safe investments don't seem like they offer much value now (or in the recent past), that's because they strongly correlate to the federal funds rate, which is near historic lows. See the graph of CD rates and the federal funds rate, here.

You may have felt differently in July of 1984, when you could get a 5 year CD with an APR above 12%. As you can see in this graph of historical CD yields, it hasn't always been the case that CDs offered such small returns. That being said, CDs are safe investments, being FDIC insured (up to the FDIC insurance limits), so you're not going to get great rates from one, because there's basically no risk in this particular type of investment. If you want better rates, you get those by investing in riskier instruments that have the possibility of losing value.


Others have pointed out why one typically chooses a CD: to lock in an interest rate that's higher than most other savings accounts (at the expense of having quick access to your money).

While most savings accounts have practically 0% return, there are high yield savings accounts out there with little to no strings that offer ~1% APY.

I've personally not found CDs to be compelling when viewed against those, especially for something like an emergency fund where I'd rather just know it's available without having to think about penalties and such.

Some people ladder CDs so that they're always no more than a month or so away from having access to some of the money, but for the return I've decided I prefer to just avoid the hassle.

For 2.25%, which I haven't really seen, I might consider it, but in any case, you're better served by paying more to your loans.


Yes. Savings accounts and CDs today pay almost nothing. They are not a way to grow your money for the future. They are a place to keep some spare cash for emergencies. I don't have such accounts any more. Personally, I generally keep about $2000 in my checking account for any sudden surprise expenses. Any other spare money I have I put into very safe mutual funds. They don't grow much either, but it's better than what I'd get on a savings account or CD.

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