Certificates of deposit (CDs) are popular savings vehicles. They’re safe, and they’re interest-bearing, so it’s easy to see why people flock to them.
However, depending on your needs, a CD isn’t always the best choice. If you want higher returns, better liquidity, or just a little more diversification in your portfolio, you might want to consider other options.
Today, we’re going to discuss some of the best alternatives to CDs. Each of these options has been selected for a particular benefit they provide, so some might be more appropriate for your financial situation than others. Carefully consider all of the alternatives below before deciding where to put your money to grow.
What Is a Certificate of Deposit (CD)?
A certificate of deposit (CD) is a savings vehicle, typically offered by banks and credit unions, that pays you a fixed interest rate on a lump sum of money over a predetermined amount of time.
The term for a CD ranges from a few months to several years. Usually, the longer the term, the better the CD rates. So, for instance, a one-year CD might yield 4.1%, but a two-year CD might yield 4.3%
Are CDs a Good Investment?
Depending on your needs, a CD can be a good investment. Usually, CD rates will beat the interest rate on a traditional savings account, and they often have higher rates than many high-yield savings accounts.
They also protect your money. Any CDs bought through a federally insured bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to at least $250,000. Any CDs bought through a credit union are insured by the National Credit Union Administration (NCUA, and often mistakenly called the National Credit Union Association), typically up to at least the same amount.
The tradeoff: CDs are an illiquid investment. (Liquidity is how easy or difficult it is to convert your investment to cash without affecting the price.) CDs require you to keep your cash invested throughout the term; if you withdraw your money before the CD matures, you will be charged an early withdrawal penalty. Additionally, other investments can earn users a better interest rate.
Whether a CD is the best investment for you, and thus whether you should consider alternatives to CDs, depends on factors like liquidity and desired rate of return, as well as others, such as risk tolerance and how long you want your money to be invested.
What Are the Best Alternatives to CDs?
To mimic CDs, you’ll need to have a low risk of loss and a commensurately low expected return.
1. High-Yield Savings Accounts
High-yield savings accounts are popular for holding emergency funds or any savings you plan to use within the next few months or years.
The “high yield” in “high-yield savings accounts” refers to the higher interest rate they sport compared to standard savings accounts—often between 20 to 25 times greater. However, CD rates are usually competitive with these accounts.
Where high-yield savings accounts shine compared to CDs is liquidity. Commonly, high-yield savings accounts let consumers withdraw or transfer money up to six times per month without any fees or penalties.
Another notable difference between these accounts is that high-yield savings rates can change while users have money in the account, whereas CD rates are fixed for the duration of the term. Consider this trait a “wash”—users can benefit from or be hindered by this depending on the direction of interest rates.
Consider placing your money in one of the most competitive high-yield savings accounts available on the market through CIT Bank. It offers an easy application process (about five minutes), extremely competitive rates, no service fees, and mobile banking functionality.
2. Treasury Bills
Much like any other individual or business, the U.S. government can borrow money to make ends meet. It does so through the U.S. Treasury, which issues three primary kinds of debt:
- Treasury bonds (T-bonds): Mature in 20 to 30 years
- Treasury notes (T-notes): Mature in two to 10 years
- Treasury bills (T-bills): Mature in 4 to 52 weeks
Treasury bills—which can have maturities of four, eight, 13, 17, 26, and 52 weeks—are sold in increments of $100 (also the minimum purchase amount) up to a value of $10 million. You can typically purchase these through the U.S. government’s Treasury Direct or through a bank or broker.
When you buy a T-bill, you lend money to the U.S. government for a specified period of time. The price for a T-bill will vary, but usually will be below the bond’s face value, or “par value.” (For instance, a $1,000 T-bill might cost $975 to purchase.) When the T-bill matures, you receive the full par value of the bond—so the return on your investment is the difference between the discounted price you paid at auction and the par value of the T-bill.
Treasuries are one of the most secure investments in the world due to their virtually guaranteed repayment. The federal government hasn’t defaulted on a debt payment since moving away from the gold standard in 1971.
When you receive the repayment of your T-bills’ face value, the income generated is exempt from state and local taxes. This can make them a good choice for investors looking for reliable, tax-advantaged income.
Invest in T-Bills with Public.com
This investing product allows you to enjoy a higher yield than even the most competitive rates on a high-yield savings account—with equal accessibility to your cash. That is, you can tap your balance anytime; you don’t have to wait for your T-bill holdings to mature.
To participate, you’ll need to open an account with Public.com and make a deposit of as little as $100. The Treasury product is offered through Public by Jiko Securities, Inc., a registered broker-dealer, member FINRA and SIPC. In exchange for the management, trading, and custody of Treasury services, Jiko charges a flat management fee of 5 basis points (0.05%) per month, or 60 basis points per year, based on the average daily balance of your Treasury account. Public deducts this amount from your Treasury account each month and receives a portion of that management fee as a referral fee.
However, even factoring in this fee, Public.com’s Treasury Account provides easy access to a safe investment that generally yields more than a high-yield savings account and is exempt from state and local income taxes.
3. Money Market Accounts
A money market account is similar to a high-yield savings account, but it provides even easier access to your money.
Money market accounts often include checkbook privileges and a debit card. This interest-bearing account usually allows up to six transfers and purchases each month, and ATM withdrawals typically are not capped.
They do have one disadvantage, however. While more flexible, money market accounts usually have lower rates than CDs.
Otherwise, money market accounts are similar to CDs. They often have minimum deposit and balance requirements. And money market account deposits are FDIC- or NCUA-insured. Also worth noting: Like high-yield savings accounts, interest rates on money market accounts can change over time, which can be both good and bad.
CIT Bank money market accounts offer extremely flexible banking, with 24/7 access and mobile banking. Plus, the bank typically offers much-higher-than-average rates.
4. Bonds (And Bond Funds)
A bond is a loan that investors give out to a government, company, or other agency. Whoever issues the bond is responsible for returning the full amount (the “principal”) by a certain date (the “maturity date”), as well as interest—typically paid on a regular basis until the bond matures.
When interest rates are high, a CD might earn more than bonds. But when rates are low, bonds might deliver a better yield.
Individual savings bonds
First, let’s U.S. savings bonds, which earn interest over time. However, unlike most other individual bonds, you only collect interest on a savings bond once you cash it in.
Series EE savings bonds
Series EE Bonds earn fixed interest rates for 30 years, and they offer a return of double the value initially purchased if held for at least 20 years.
In other words, if you hold a Series EE savings bond for at least the next 20 years, the bond will either earn enough in interest to double its initial value, or the federal government will make a one-time adjustment to the price (adding money) to honor its guarantee. (But remember: You can let it accumulate interest for up to 30 years, so you don’t have to stop at 20.)
You can cash in (redeem) your EE bond after 12 months. However, if you cash in the bond in less than five years, you lose the last three months’ worth of interest. For example, if you cash in the bond after 18 months, you only receive the first 15 months’ worth of interest.
You must spend at least $25 when buying Series EE bonds. Above that, you can spend any amount down to the penny. (Example: You could buy $152.57 worth of EE bonds.)
Series I savings bonds
Series I savings bonds have both a fixed interest rate, as well as an inflation-adjusted interest rate that’s calculated twice each year. The reason? Series I savings bonds are designed to protect your savings from inflation (rising prices).
Like with EE bonds, Series I savings bonds require a minimum $25 purchase, but you can select any amount over that down to the penny. But while Series I bonds also accumulate interest over 30 years, there is no 20-year value guarantee like with EE bonds.
Series I bonds also have the same redemption rules: You can cash them in after 12 months, but if you cash them in less than five years, you’ll lose three months’ worth of interest.
For most investors, it makes sense to hold most bonds in the form of bond funds, whether that’s a mutual fund, exchange-traded fund (ETF), or closed-end fund (CEF). That’s because outside of U.S. savings bonds, most bonds are difficult to research and difficult to access individually.
A bond fund pays out cash distributions on a set schedule specific to the fund. Those distributions will typically be bond interest, which is taxed at your ordinary income tax rate. However, some distributions will involve capital gains from the selling of bonds within the fund, not to mention, you might generate capital gains from selling the bond fund itself. Taxes on those will be determined by capital gains tax rates.
One tax-friendly type of bond you’ll want to own through a fund is called a “municipal bond.” Investors buy municipal bonds (aka “munis”) from cities, states, counties, or towns that need to finance a public project or other activities.
These bonds are exempt from federal income taxes and usually from state and local taxes, as well, provided the investor resides in the issuing state and/or community. The headline yields on these bonds are often lower than comparable taxable bonds, but once you account for the taxes you’re not paying, they can end up yielding more.
5. Money Market Funds
Money market funds are open-ended mutual funds that invest in debt securities with short maturities. This is considered a low-risk investment with very low volatility.
Investors receive steady interest income from these investments. Depending on the types of securities in the fund, the income generated is either taxable or tax-exempt.
There are several different types of money market funds, including:
- Treasury (only holds Treasury securities)
- Government (holds Treasury and other agency securities)
- Prime (holds many types of debt security)
- Municipal (holds municipal debt securities)
Money market funds are more liquid than CDs and offer comparable (and sometimes higher) yields.
Because money-market funds invest in extremely short-term, extremely high-quality debt, they’re considered one of the safest investments on the planet. However, a few have failed on rare occasions (for instance, during the Great Recession). So any money up to the FDIC/NCUA limit is technically safer in a CD. But money market funds remain an extremely safe place to earn some extra money on your money.
Many brokerage accounts will actually sweep idle cash into their money market funds so you’re still earning interest even if you don’t have all of your funds invested. Plynk, for instance, is an easy-to-use brokerage app that lets you invest in stocks, ETFs, mutual funds, and cryptocurrency, starting for as little as $1. Plynk auto-invests idle cash into the Fidelity Government Money Market Fund (SPAXX), which holds U.S. Treasury and other government debt—investments that are considered very safe compared to other debt securities.
Related: 8 Best Personal Capital Alternatives
6. Dividend Stocks (And Dividend Funds)
Dividend stocks are companies that regularly share profits with their investors through cash distributions (dividends). And if you want to diversify past one or two dividend stocks, you can easily own dozens or hundreds at once through dividend mutual funds or dividend ETFs.
Dividend-paying stocks offer both passive income as well as possible capital appreciation (gains from stock values going higher). The overall earnings potential from dividend stocks and funds greatly exceeds what you can earn from CD interest, plus they’re extremely liquid investments you can sell at any time.
However, dividend-paying stocks and funds aren’t immune to stock market volatility, so your assets could potentially decrease in value, too. Thus, they are riskier investments than CDs.
7. Paying Off High-Interest Debt
Believe it or not, paying off your debt might be a more worthwhile investment than a CD.
If you have debt with an interest rate that’s higher than what your money would earn in a CD, you’re actually falling behind by putting your money in that CD. For instance: If your CD could earn 4% a year, but you have a loan that charges 8% interest, you’re much better off knocking out that debt.
There isn’t a set percentage that qualifies as “high-interest debt.” Many credit cards have rates higher than 20%, as do many payday loans, but you don’t need interest that high to make the tradeoff worth it. As long as your debt’s interest rate is substantially higher than the CD’s, pay off the debt.
Also worth noting: A CD locks up your funds. And people with substantial high-interest debt might not even have an emergency fund, and thus aren’t in a financial position to lock money up in a CD.
Other Investments to Consider for Greater Yield (and Risk)
8. Broad Alternative Investments
Alternative investments is a catch-all term for any investment that doesn’t fall into the categories of stocks, bonds, or cash. It covers a wide variety of investments, from real estate to fine art to sneakers, and it has become increasingly popular as fintech services have opened up once-restrictive markets to the individual retail investor.
Participate in several alternative investments with Yieldstreet
Yieldstreet is one such platform leading the charge to provide access to income generating assets in a number of asset classes.
Yieldstreet is an alternative investment platform that provides you with income-generating opportunities. These investment options come backed by collateral, typically have low stock market correlation, and span various asset classes. Such asset classes include:
- Art finance
- Real estate
- Commercial finance
- Legal finance
- And more
Yieldstreet, which has been in business since 2015, has returned more than $600 million to its investors since its founding.
Historically, annual returns range anywhere from 3% to 18%, depending on the goal-based strategy. Yieldstreet offers predefined payment schedules (e.g., monthly or quarterly payments), and they may pay principal and interest upon the occurrence of certain events, such as settlement within a legal finance investment.
The durations of investment opportunities range from three months to seven years. Investment minimums start as low as $2,500, but can go well into five digits.
Yieldstreet technically is open to all investors, as non-accredited and accredited investors alike can participate in the Yieldstreet Prism Fund. However, you must be an accredited investor to participate in all other Yieldstreet offerings.
Learn more, and consider accessing these passive income investments, by opening an account today.
Consider investing in short-term debt Alpine Notes with EquityMultiple
Are you an accredited investor looking for a short-term investment with attractive returns? Meet EquityMultiple’s Alpine Note series.
Alpine Notes are a savings alternative with competitive rates of return on three-, six-, and nine-month notes, providing another means of conservative diversification and short-term yield. Compared to the commercial real estate crowdfunding platform’s other investment offerings, these notes are extremely short-term in nature, and thus an optimal choice for EquityMultiple users who want better liquidity.
While the notes aren’t as liquid as a savings account, they do offer maturity dates that tend to be shorter than your typical CD—and significantly higher rates of return. While this product isn’t FDIC-insured, EquityMultiple does add a degree of protection by assuming the first-loss position in case of default. That means EquityMultiple will purchase a small portion of the aggregate notes issued in a series and will only receive payments after all other investors receive their total principal and interest. Such an arrangement puts their capital at risk, adding skin in the game and aligning their interests with yours.
In case you’re wondering what EquityMultiple does with your funds that justifies paying you such a healthy return, the platform takes the capital you provide and uses it as a line of credit to sponsors who bring real estate investments to EquityMultiple’s core investment platform. The credit allows sponsors to receive surety of funding on initial closing, thus attracting more high-quality investments from high-quality sponsors.
With EquityMultiple’s Alpine Note, you’ll need to be both an accredited investor and have at least $5,000 to participate. If you’re interested in accessing higher yields than traditional CDs or money market accounts, the Alpine Note series is one of the simplest and most efficient ways to take advantage of EquityMultiple’s real estate investment opportunities without tying up your money long-term.
Related: Best Quicken Alternatives
9. Crowdfunded Real Estate
Crowdfunded real estate is when investors pool money together to purchase a real estate asset. By pooling their resources, small-money investors can participate in assets—such as, say, office buildings or retail property—they otherwise might not have been able to afford on their own.
Also, real estate investing platforms—such as Fundrise and EquityMultiple—allow you to invest in properties without having to renovate, find tenants, and participate in other landlord activities, and greatly reduce the amount of research you have to do to find investment-worthy assets.
Some real estate crowdfunding projects pay dividends or other regular distributions to investors, some pay out a portion of the proceeds when a property is sold, and a few offer both.
One major drawback of crowdfunded real estate investments: They’re usually highly illiquid, requiring investment money to be locked down for several years—five years is common. While you can find three- and five-year CDs, you do have options that are as short as three months.
And while the overall rewards can be much greater than CD rates, there is also more risk.
Some people confuse crowdfunded real estate with peer-to-peer lending, but they’re not the same thing. Peer-to-peer lending typically involves loans, made out to companies of all sorts; real estate crowdfunding usually involves equity investments in/ownership of real estate.
10. Inventory and E-Commerce Financing
This is a rare subset of alternative investment, but a few companies specialize in finding investors like you to help finance specific parts of company operations.
Keep small business engines running with Kickfurther
Kickfurther is a digital marketplace that distinguishes itself in the world of crowdfunding by allowing investors to fund not entire companies, but one pivotal part of the process: inventory. Specifically, instead of investing in or loaning money to a business, Kickfurther’s technology allows you to earn profits by facilitating consignment.
So … what exactly does that mean?
Let’s say a small business develops a product that sells like gangbusters, and there’s clearly more customer demand to be fulfilled. In many cases, this small business will need a considerable sum of cash to produce enough inventory to meet that demand. Banks are often hesitant to give early stage companies the money they need. However, Kickfurther provides companies with the money they need—and the flexibility not to pay that money back until the inventory is sold—by connecting them to a marketplace of users.
The Kickfurther platform allows its users to purchase this inventory up-front for the brand and earn a profit as the inventory is sold.
Kickfurther users are provided with consignment opportunities (Co-Ops) from brands that have already demonstrated a track record of sales and now need to produce more inventory to keep up with demand. Co-Ops will outline the inventory to be purchased, a specific profit for each piece of inventory sold, and an estimated timeline of when the inventory will be sold and the Co-Op will be completed (typically a matter of months). Users aren’t just flying blindly, of course. Kickfurther provides company and product details, as well as other information about the deal—how it’s structured, whether the brand has a Uniform Commercial Code (UCC) lien on inventory, whether it’s a repeat order, and more.
Signup is easy. Create a user account by providing basic information like your name, phone number, and email address. You can then link a bank account to your Kickfurther account so you can deposit funds, and you’re ready to purchase inventory for your first Co-Op. Signing up for a Kickfurther account costs nothing. Inventory is sold as “packs” for each Co-Op which consist of specific inventory. Each pack usually costs between $100 and $500 to purchase, but you can participate in some Co-Ops for as little as $20.
Buyers who want enhanced access to deals can sign up for the optional Copilot feature. Copilot features a system based on “Engagement Points” (EPs), which can be earned through a number of activities. Buyers who have EPs can select their preferred Co-Op criteria—say, a minimum credit score for the brand, or a minimum monthly profit—and if a Co-Op launches that meets that criteria, they’ll receive an allocation. The user must review and approve that allocation within 24 hours, and they’re charged a 0.5% fee on whatever dollar amount they contributed to the deal.
There are some inherent risks related to purchasing consignment inventory. Primarily, the inventory might not sell as expected, or it might not sell at all. The business could also breach the contract and fail to provide payment for the sales of the consignment inventory. However, Kickfurther says only 5% of deals go into “canceled” status, and even if the Co-Op is canceled by the buyers, inventory may be returned or payment may be received after such cancellation. If a brand fails to meet sales expectations and takes longer than expected to complete a Co-Op, they often provide additional profit to buyers.
However, even after accounting for potential losses, Kickfurther says the average annualized profit rate offered on Co-Ops under their current approval model is 15.0%.
Still, Kickfurther remains an interesting portfolio diversification option for low-, mid- and high-dollar investors alike—especially those looking for more liquidity than real estate and equity crowdfunding opportunities offer, which can lock up funds for years. Learn more about Kickfurther or sign up today.
11. Permanent Life Insurance
Permanent life insurance offers lifelong coverage that will pay out a tax-free benefit to your beneficiary (or beneficiaries) in the event of your death. And unlike term life insurance, which will only cover you over a certain time period, permanent life insurance covers you regardless of how old you are when you pass.
The thing is, permanent life insurance policies also build up a cash value—one that can grow on a tax-deferred basis. You can eventually borrow against that sum, withdraw portions of it, or cancel the policy completely for cash.
The drawback, of course, is that they can be expensive and take a long time before your gains outweigh what you’ve paid in premiums. Moreover, withdrawing from this type of policy will decrease your death benefit, and surrendering a policy typically incurs heavy fees, leaving you with much less cash than the policy was worth.
Typically, permanent life insurance should only be purchased to leave behind money to family members and other loved ones. The cash-savings potential is a secondary benefit that’s far more complex than simply stashing money into a CD.
Frequently Asked Questions (FAQs) About CDs
Is a Certificate of Deposit Considered a Safe Investment?
Yes, a certificate of deposit (CD) is considered a safe investment. It’s one of the safest savings options available. Your potential earnings with a CD are fixed. And any CDs bought through a federally insured bank are FDIC-insured up to at least $250,000, while any CDs bought through a credit union are NCUA-insured up to at least the same amount.
What Happens if You Surrender a CD Early?
If you surrender a CD early, you are required to pay an early withdrawal penalty. The penalty varies by bank or credit union and is usually based on the interest the CD paid. And if your CD accrued less interest than the penalty amount, you could lose money from your principal.
Thus, it’s generally recommended to only put money in a CD if you’re confident you won’t need that money before the maturity date.
What Kind of Interest Rates Do CDs Pay?
The CD rates you can get vary by financial institution. The rates change over time, but when you put money in a CD your rate is locked in until your CD reaches maturity.
The longer the term length, the better CD rate you receive. Currently, the average CD APY is around 0.93% on a one-month CD, and 2.10% on a five-year CD. But it’s worth shopping around—some rates on five-year CDs reach higher than 4% at present.
What Is the Minimum Deposit for a CD?
The minimum deposit for a CD varies depending on the bank or credit union. Usually, the minimum is between $500 to $1,000. However, occasionally a bank will have a smaller minimum; some institutions have much higher minimums.