A certificate of deposit (CD) is a savings product offered by banks and credit unions that provides a fixed interest rate for a set term. While CDs are great for predictable returns and low risk, their fixed rates might not keep up with inflation, which can lower the real value of your returns. That’s likely why you're here—looking for CD alternatives.
Choosing the right investment for your hard-earned money is crucial for growing your wealth and ensuring long-term financial security. Fortunately, there are numerous CD alternatives that offer competitive returns with greater flexibility and lower penalties for early withdrawal. Keep reading to understand your options.
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When are CDs a good investment?
CDs might be a good investment if you prioritize safety and guaranteed returns over high yields. They're particularly suitable for short- to medium-term savings goals, like saving for a down payment or a vacation, where you can leave your money untouched for a set period.
Like traditional savings accounts, CDs are insured by the FDIC (Federal Deposit Insurance Corporation), making them a secure place to park your money. But they generally offer higher interest rates than savings accounts, in exchange for not being able to access your money until the term is over.
In a rising interest rate environment, short-term CDs allow you to reinvest at higher rates upon maturity. If you seek stability and want to avoid market volatility, CDs can be a solid choice for your investment portfolio. However, depending on your investment goals and profile, CDs might not always be the best option.
What can I use instead of a CD? 6 alternatives to consider
Here’s a closer look at some attractive certificate of deposit alternatives that might suit your needs:
1. High-yield savings accounts
High-yield savings accounts typically give you better interest rates than regular savings accounts, plus you can still access your money easily. Many online banks offer these accounts, with some of the top ones in 2024 providing rates over 4.00% APY (Annual Percentage Yield), according to Bankrate.
These accounts are ideal for short-term savings and emergency funds, and are popular among investors looking for better returns without sacrificing liquidity.
Reasons to consider a high-yield savings account:
- Higher interest rates compared to traditional savings accounts
- Easy access to funds
- Available from many online banks and financial institutions
- Low risk level
2. Money market accounts (MMAs)
Money market accounts (MMAs) combine features of both savings and checking accounts. They offer higher interest rates and include check-writing privileges and debit card access. People often choose MMAs for their flexibility and slightly better returns compared to standard savings accounts. They’re a reliable option for keeping your funds liquid while earning a competitive interest rate.
Reasons to consider an MMA:
- Features of both savings and checking accounts
- Higher interest rates with check-writing privileges
- Flexible and reliable for keeping funds liquid
- Low risk level
3. Treasury securities
Treasury securities—including Treasury Bills (T-Bills), Treasury Notes (T-Notes), and Treasury Bonds (T-Bonds)—are popular for their safety and predictable returns, making them a top choice for conservative investors since they are backed by the U.S. government.
These low-risk investments offer various maturity terms to fit both short-term and long-term strategies. “T-Bills mature in under a year, T-Notes in two to 10 years, and T-Bonds in over 10 years,” says Nischay Rawal, a certified public accountant at NR Tax & Consulting. “Rates are often higher than those of CDs, but returns aren't guaranteed if sold early. However, the risk of default is near zero.”
Reasons to consider treasury securities:
- More than one option; Treasury Bills (T-Bills), Treasury Notes (T-Notes), and Treasury Bonds (T-Bonds)
- Backed by the U.S. government
- Various maturity terms, catering to both short-term and long-term strategies
- Very low risk level
4. Municipal bonds
Municipal bonds, issued by state and local governments, are attractive to investors, especially those in higher tax brackets, because the interest income is often exempt from federal, state, and local taxes. This tax advantage can make them more appealing compared to other investments.
For example, a municipal bond with a 3.5% yield could be equivalent to a taxable yield of 6.9% for investors in the highest tax brackets. As of August 2024, the Bloomberg Municipal Bond Index has a yield of 3.8%, which translates to a tax-equivalent yield of approximately 7.6% for top-tax-bracket investors.
Aside from these tax benefits, municipal bonds are considered relatively low-risk due to the low likelihood of default by the issuing entities. However, they do come with some risks, including interest rate risk and purchasing power risk. Despite often having lower coupon rates, the tax-equivalent yield can provide competitive returns for investors in higher tax brackets.
Reasons to consider municipal bonds:
- Issued by state and local governments
- Often exempt from federal, and sometimes state and local taxes
- Attractive to investors in higher tax brackets
- Low to moderate risk level (depending on the issuing municipality)
5. Dividend-paying stocks
If you're looking to combine growth with income, dividend-paying stocks might be a good choice. They offer regular dividend payments, which provide a steady income stream, while also giving the potential for capital appreciation. Investors often favor reliable companies with high dividend yields, making these stocks a common alternative to CDs for those who are willing to take on a bit more risk in exchange for potentially higher returns.
Reasons to consider dividend-paying stocks:
- Provides regular dividend payments and potential for capital appreciation
- Combines growth with income
- Attractive to investors willing to take on more risk for higher returns
- Moderate to high risk level
6. Exchange-traded Funds (ETFs)
ETFs are often chosen for their diversification, flexibility, and relatively low fees. They provide investors with exposure to a broad range of assets, including stocks, bonds, and commodities, all through a single investment. ETFs can be traded like stocks on major exchanges, providing liquidity and ease of access.
This versatility makes ETFs a common alternative to CDs for both novice and experienced investors. Passively managed ETFs typically have an average expense ratio of around 0.16%, while actively managed ETFs usually have higher expense ratios. Additionally, many brokers now offer commission-free trading for listed ETFs, which further reduces the cost of investing.
Reasons to consider ETFs:
- Diversification, flexibility, and relatively low fees
- Exposure to a broad range of assets
- Ability to be traded like stocks on major exchanges
- Variable risk level (depends on the type of assets within the ETF; generally moderate)
Choosing the best CD alternative for you
If you're wondering, “So what's better than putting money in a CD?” these six popular options can offer U.S. investors better returns, greater flexibility, and diversified portfolios. Each alternative has its own set of benefits and risks, allowing you to choose what best fits your financial goals.
“For most investors, a balanced portfolio including both CDs and stocks is ideal,” says David Blain, CEO of BlueSky Wealth Advisors. However, it’s important to consider your risk tolerance, investment timeline, and profile.
“Stocks may offer higher returns but also higher risk,” says Nischay Rawal, a certified public accountant at NR Tax & Consulting. “Short-term or lower-risk investors may prefer Treasuries or high-yield savings accounts. Longer-term investors could consider dividend-paying stocks.”
Promising CD alternatives for investors
In the coming years, Blain highlights high-yield online savings accounts and robo-advisors as attractive options for income-focused investors. “Online banks often offer higher rates than traditional institutions, and robo-advisors provide low-cost, customized investment portfolios tailored to your needs,” he says. “These options can provide stable cash flow with the potential for long-term growth.”
By considering these alternatives, investors can effectively grow their wealth while maintaining the flexibility to adapt to evolving financial landscapes.