Thursday, June 9, 2016

CD Closure

For years, I've used CDs as a place to keep medium-term savings. Now I'm about to close out my last one, and things will have to change pretty significantly before I'll get another one.
A CD is a certificate of deposit account. It's like a savings account, but instead of being able to deposit and withdraw whenever you like, the account has a fixed term. You have to pay a penalty fee if you withdraw your money before the end date. In return, the interest rate is higher than a normal savings account. Like savings accounts, CDs are FDIC insured.

Using CDs for savings that I expected to use somewhere in the 2-5 year range made sense, back when I first started using them. I got the benefit of the higher interest rate, and the FDIC insurance meant that I didn't have to worry about losing the money if something catastrophic happened in the financial markets. In an emergency, I could get to the money quickly, though it would incur that penalty fee.

If interest rates are decent, CDs make good long-term investments as well. The usual strategy for this is a "ladder." Buy some longer-term CDs, usually 3-5 years, but stagger the maturity dates so you have a portion maturing each year. That way, every year you have the option of renewing or withdrawing part of the money, while still getting the benefit of longer-term interest rates.

Lately, those interest rates have not been decent. From 2008 to 2010, rates fell sharply as the economy slowed. Since then, rates have remained historically low. (Fortunately for us savers, inflation has been low as well, but it's still not a great situation.) Super-low rates means that CDs aren't much better than simply keeping your money in a savings or checking account, where you have easy access to it all the time.

Without the incentive of a reasonable rate of return, I don't see any point in locking my medium-term savings up in account that restricts access. I may look at CDs again in the future if interest rates rise, but until then, basic savings and checking accounts are a better option.

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