On CDs — and not the Jonas Brothers kind

October 19, 2022 • Issue #165

Hi y’all —

If I asked you to guess how many Jonas Brothers CDs are in my bedroom right now, what would you say?

The answer is nine — and here’s the kicker: As much as I’d like to blast “Year 3000” and stage a one-woman air guitar show, it’s not like I have a boombox anymore. My laptop doesn’t even have a slot for CDs. The discs are just for show; it’s Spotify or bust these days.

CDs aren't totally irrelevant, however. Not the type that come with a fold-out poster of a smoldering pop star — but as part of a well-rounded financial strategy.

Let’s learn more: How do certificates of deposit work? Can they help me save money?

Many experts mention CDs in the same breath as high-yield saving accounts, because they allow people to lock in an interest rate for an agreed-on period of time. 

“It is a good product for customers to be able to park money to the side, save and earn interest," says Steve Goodman, managing director and head of product, consumer banking at Chase.

The time element is key: Funds generally need to stay in CD accounts for an agreed-upon period if I want to withdraw them (and any interest earned) without penalty.

CD terms typically range from one month to 10 years. The longer the term, the higher the interest rate.

At Discover, for example, CDs with three-month terms have a 1% APY. Those with nine-month terms have a 1.85% APY, and 10-year terms have a 3.5% APY. (Each option requires a minimum deposit of $2,500, but you get the idea.)

“Certificates are ideal once you get in a position, financially, to commit to setting aside a specific amount of funds for a specific amount of time,” says Amber Fielder, senior vice president and chief marketing officer at USE Credit Union. “You can even consider creating what we call a certificate ‘ladder’ where you have a series of certificates maturing at different times throughout the year.”

One of the perks of CDs is that they’re insured up to $250,000 by the FDIC, meaning they’re a pretty safe place to put my cash. This makes them popular: According to the analysts at Crane Data, banks were holding about $133.8 billion in CD accounts as of September.

CDs are often compared to high-yield savings accounts, but they differ in a few major ways.

For one, when I open a CD, I’m locking in the APY as of that date — it doesn’t usually fluctuate like high-yield savings rates do. Fielder says I also can’t add more money over time. Everything is fixed.

But perhaps the biggest difference between high-yield savings accounts and CDs involves withdrawals.

With the former, I can take money out whenever I want (and I do, like whenever the JoBros announce a new show). With the latter, though, I’m basically promising to leaving the sum in the CD for the length of my term.

If I want to access that money before the term is up, I might lose some — or all — of the interest I’ve earned.

Because of this, CDs tend to work well for people who have a defined time horizon and goal in mind. So if I have a vacation I know I'm going to take next year or a laptop purchase I'm eyeing in the next three, a CD may be worth considering.

However, “if you need really quick, early access to funds and don’t want to lock them up in one particular deposit account, a savings account may make more sense” than a CD, Goodman says.

Ditto if I’m still building my emergency fund, because I don’t know when I’ll need access to that money.

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

CDs are another method I can use to sock funds away. But they’re tied to a defined time period, and there’s not a ton of wiggle room. The high interest rates can be appealing, but if I’m looking for flexibility, CDs won’t provide it.

That said, they could be a good avenue in the future.

“As you get your financial life in a more solid position and start to accumulate savings beyond what you need day-to-day and for an emergency fund, certificates can be a really valuable option for growing your money safely,” Fielder says.

VIA GIPHY

RECEIPT OF THE WEEK

check out this wild celebrity purchase

VIA INSTAGRAM

I don’t really know what’s going on but football player Tom Brady, basketball star LeBron James and entrepreneur Gary Vaynerchuk have all recently invested in pickleball teams? They’re trying to grow a professional team league called — yup — Major League Pickleball, which props up the fastest-growing sport in the country. From an investing perspective, that sounds like a sweet dill.

INTERNET GOLD

five things I'm loving online right now

1	Did you guys know that the Cookie Monster has an actual name and it’s Sid? Anyway, this sent me down a rabbit hole on the Muppet Wiki (a real thing) where I also learned that the Cookie Monster was originally green, that he lives in a rent-controlled apartment, and that the “cookies” he eats on camera were originally painted rice crackers so as not to get oils on the puppet.
2	Cat and duck: friends or enemies?
3	Yes, bartender? I’ll take one Negroni sbagliato — with prosecco in it, please.
4	In the new video game Stray, players guide an orange tabby cat through a city — and, in some cases, raise money for animal shelters. “I certainly hope that maybe some people will be inspired to help actual strays in real life — knowing that having an animal and a companion is a responsibility,” one of the game’s producers told the Associated Press. Fun fact: In addition to being a favorite of Twitch streamers and animal adopters, cats love Stray, too.
5	I have not (YET) tried this recipe, described as “the best of a brownie, a candy bar and an ice cream sandwich,” but wow it looks amazing.

401(K)9 CONTRIBUTION

send me cute pictures of your pets, please

VIA Cynthia Whipple

This is Oliver, who’s hanging onto a Frisbee like I’m hanging on to my funds in a CD.

See you next week.
 

 
P.S. Do you have any CDs (the money kind)? What’s your favorite CD (the music kind)? Tell me how to get to Sesame Street at julia@money.com or @SuperJulia on Twitter, please and thank you.

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