Certificates of Deposit, or CDs as they are more commonly known, have long been the go-to savings product that people depended on to grow their cash reserves. With a guaranteed rate of return, CDs are considered one of the safest and most stable financial vehicles out there. But with interest rates so low, are they still a viable option?

CDs are essentially how banks are able to make money. When you deposit your money in a banks Certificate of Deposit, you are essentially loaning the bank your cash. The bank then takes this cash and uses it to make loans to other customers in the form of mortgages, auto, and personal loans. When those loan customers make payments, a certain amount of the interest (profit) the bank makes goes back to you, the CD customer. This is the interest you gain on your money during your CD term.

Pros and Cons

One thing that differentiates a CD from other accounts is the term. CDs are not transaction accounts, therefore once you put your money into a CD account, it’s locked in there for however long the CD is written for. Usually the longer you put your money into a CD, the higher the return interest rate. The point is to basically freeze the funds so the bank can then use them to write out loans. As the bank gets paid back, part of their profit goes to you. The longer you allow the bank to use your funds, the more they’re going to pay you in interest. They want to have as much of your money in their CDs as possible, for as long as possible, so they’re going to give you better rates to keep you interested.

So what’s the problem with this approach? Your money is stuck! If you open a ten year CD at a certain interest rate, and a better one comes out the next week, or even years later, you can’t take your money out and switch (well, you can, for a hefty fee. Usually this fee is more than you would earn by switching to the higher interest rate). You then have to sit and wait until the ten years is up to get your cash. Another thing to keep in mind is emergencies. If you suddenly have a medical expense or car repair, your money is stuck in that CD.

So why invest in CDs at all? They’re guaranteed. You will never lose any of your principle to market changes or botched stock trades. You will always walk away with more money than you started with. The question is, of course, how much more. Shopping for rates can be a tedious and frustrating experience, particularly if you’re investing in shorter term CDs. You might spend forever going from bank to bank to find the best rate of return, only to have to do it all over again in a year or two when it matures. However, if you’re saving for your kid’s college fund or your retirement, it would make sense to include several CDs in your portfolio. Even if more risky investments, like stocks don’t work out and lose you money, you’ll always have a safety net in the form of your CD. Another little perk is the fact that it stops you from those impulse buys. If you want that brand new plasma TV and have easy access to junior’s college fund, you might be tempted. CDs are not only secure in terms of return, but they also save you from your worst enemy: yourself.