Why You Should Include CDs in a Diversified Savings Plan


Saving money can be challenging when you are just starting your career. Even with the cost of rent, groceries, entertainment, and even student loans, your 20s are the best time to start making good financial decisions. You have maximum earning power and fewer financial obligations in your 20s and 30s, which makes it the perfect time to start saving for the future.

There are many tools to help you save, but which is best to help you reach your goals?

Most people start saving with a traditional savings account. While a savings account is a great tool to set money aside, the interest rates are typically lower, so you earn very little on deposits. There are other tools to help you save money and give you a higher rate of return, such as certificates of deposit (CDs).

When economic times become difficult, smart savers look for accounts that lock up their money in exchange for a better return. That’s why CDs are gaining popularity. They let you put money aside at a better interest rate.

Benefits of a Certificate of Deposit

Unlike savings accounts or money market accounts, CDs (also called share certificates by credit unions) offer a higher rate of return in exchange for a commitment to keep your money on deposit for a period of time, typically from a few months to up to five years. The advantage of CDs is that you get a guaranteed interest rate that is not tied to changing interest rates. Your money is also insured, unlike other money-earning vehicles such as stocks or mutual funds. The return on your CD investment is assured, although there is a penalty for early withdrawal.

So, what’s the appeal of buying certificates of deposit? If you’re saving for a planned expense, such as a family trip or college tuition, then CDs can be very attractive. CD interest rates can be up to six times higher than the average savings interest rate. You can lock up your money at a higher annual percentage yield (APY), and CDs are federally insured up to $250,000.

As you develop a savings strategy you want to think about different types of savings. Your first priority should be to establish an emergency fund so you have cash readily available in case of a financial or family emergency. Once you have an emergency fund in place, consider putting money in high yield accounts like CDs that give you a better return on your savings.

How to Shop for a CD

As with any type of savings account, there are specific things to look for when shopping for the right CD:

Interest Rates

You want to get the highest return for your money, but you also want to take advantage of changes in interest rates. For example, if interest rates rise, then a short-term CD should let you reinvest at a higher rate. If interest rates fall, then a long-term CD can protect your money.

Minimum Deposits

Some financial institutions require a minimum amount to open a CD. Read the fine print before you invest.


You want to shop for the best annual percentage yield (APY), but consider APY as part of the overall terms of the CD. APY is the annual return rate, but if you invest in a CD for 18 or 24 months, you would earn more than the 12-month APY over the life of the CD.

Compounding Interest Frequency

You want to keep your CD on deposit for the length of the CD term, but it still pays to know when interest is added, whether it’s monthly, quarterly, or annually. This tells you how fast your money will grow and what you may lose in the event of early withdrawal.

Any Penalties

Even though you don’t plan to cash out your CD early, you should know what the penalties are in the event you have a financial emergency.

Laddering Options

Laddering is a popular strategy for CD investing. With laddering, you split an investment so the terms overlap. For example, you may split a $15,000 investment into three CDs: $5,000 for one year, $5,000 for two years, and $5,000 for three years. As each CD matures, you can cash it out or roll it back into a three-year CD at a higher interest rate. 

Explore Certificate of Deposit Options with iQ

Certificates of deposit can be a smart addition to any savings strategy since they let you lock your money away for a guaranteed rate of return. You can use CDs to plan for a special expense or purchase or to have peace of mind that you have money saved.

Your credit union offers the best rates possible on CDs as a service to members. It pays to talk to a financial advisor or stop by your local iQ Credit Union branch to learn more about CD options and the latest CD rates. Take the time to do your homework and understand which option best meets your needs.

CDs should be only part of a diversified savings strategy. To learn more about ways to save and how to get the highest return for your money, be sure to read The Ultimate Guide to Simple Savings.


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