Exploring Alternatives to Certificates of Deposit (CDs)

Certificates of deposit (CDs) are a popular choice for low-risk investments. When you fund a CD, your money earns interest over a set maturity period, which can range from one month to several years. Upon the CD’s expiration, you receive your initial investment plus the accrued interest. While CDs often offer higher yields than traditional savings accounts, they come with penalties for early withdrawals. If you’re seeking more liquidity, consider these three alternatives to CDs that might better suit your financial needs.

High-Yield Savings Accounts

A high-yield savings account functions similarly to a traditional savings account but offers significantly higher annual percentage yields (APYs). This makes it an excellent option for storing your emergency fund. Online banks typically provide the best yields, but it’s wise to compare rates and fees across different institutions to ensure a high-yield savings account meets your needs.

Pros

• Competitive interest rates: Some high-yield savings accounts offer rates as high as 5.40%, compared to the average rate of 0.46% for traditional savings accounts, according to the Federal Deposit Insurance Corp. (FDIC).
• Easy access to your money: Unlike CDs, high-yield savings accounts allow easy access to your funds. You can transfer money online or withdraw cash from an ATM, providing liquidity in case of a financial emergency.
• Low risk: High-yield savings accounts are FDIC-insured up to $250,000 per account holder, per insured bank, and ownership category. Credit unions offer similar coverage, minimizing the risk of losing your money.

Cons

• Missing out on higher CD rates: Some CDs offer interest rates as high as 6.50%, allowing you to earn $65 for every $1,000 invested.
• Potential fees: Some banks and credit unions impose fees on high-yield savings accounts, such as monthly maintenance fees, overdraft fees, and out-of-network ATM fees. You may also need to meet minimum balance requirements.
• Possible withdrawal restrictions: Some institutions limit consumers to six free electronic transfers and withdrawals per month, which could be problematic if you need frequent access to your funds.

Money Market Accounts

Money market accounts earn interest like savings accounts but offer greater ease of withdrawal. While APYs vary, they are generally higher than those of traditional savings accounts.

Pros

• Accessibility: Unlike CDs, money market accounts offer more flexibility. You can pay bills and make purchases online or in person using a linked checkbook or debit card without facing penalties for early withdrawals.
• Higher yields than traditional savings accounts: Some money market accounts offer rates up to 5.25%, helping your savings grow faster.
• Suitable for different financial goals: Money market accounts are ideal for holding your emergency fund or saving for a home down payment, vacation, or other financial goals. You earn interest without sacrificing liquidity.

Cons

• Potential minimum balance requirements: Some financial institutions require you to maintain a minimum balance, charging a fee if your balance falls below that amount.
• Opening deposit requirements: While some money market accounts have no minimum opening deposit, others may require up to $2,500, depending on the institution.
• Less robust returns than CDs: While money market accounts offer higher yields than traditional savings accounts, CDs often provide even higher returns, though at the cost of liquidity.

Bonds

Bonds are a type of debt security where you lend money to the bond issuer, who is obligated to repay you with interest. Corporations, local municipalities, and the federal government all issue bonds.

Pros

• Low risk: Bonds, especially government bonds, carry a low risk of losing money. However, “junk bonds” or high-yield corporate bonds come with a higher risk of default.
• Potential for regular income payments: Most bonds provide fixed interest payments every six months, offering a reliable income stream that you can spend or reinvest.
• Possible tax benefits: Earnings from government bonds may be exempt from federal income taxes, and you might also avoid local and state income taxes, depending on your location.

Cons

• Modest returns: According to Vanguard, the average annualized return for bonds from 1926 to 2019 was 5.3%, compared to 8.33% for a 60/40 stock portfolio.
• Callable bonds: Some bonds can be repaid early by the issuer, cutting off future income. This typically occurs when interest rates are declining.
• Subject to inflation: As inflation rises, the fixed income from bonds decreases in value, particularly affecting long-term bonds.

The Bottom Line

CDs offer high APYs but require sacrificing liquidity, which can be problematic if you need access to your money before the term ends. High-yield savings accounts, money market accounts, and bonds are viable alternatives, each with its own set of pros and cons. These options are all considered low-risk investments, providing varying returns and levels of liquidity.

Regardless of where you choose to keep your money, maintaining good credit health is crucial. A strong credit score can help you secure the best rates on loans, credit cards, and other types of financing. Regularly check your credit score and report to stay informed about your credit health.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons. We are committed to providing you with the best mortgage solutions tailored to your financial goals.