Is a 3-Month Certificate of Deposit Worth It?

A Certificate of Deposit (CD) is a specialized savings account where a fixed sum of money is held for a predetermined term. For a 3-month CD, this term is approximately 90 days. In exchange for committing funds for this duration, the investor receives a fixed interest rate, typically higher than standard savings accounts.

Understanding 3-Month Certificates of Deposit

A 3-month CD requires funds to remain deposited for the full three-month maturity period. The interest rate is established at account opening and remains constant throughout this term, with interest commonly paid at maturity. This fixed rate provides predictability regarding earnings.

Bank-issued CDs are protected by the Federal Deposit Insurance Corporation (FDIC). Deposits are insured up to $250,000 per depositor, per FDIC-insured bank, and per ownership category. This coverage extends to both the principal and any accrued interest, offering a safeguard against bank failure.

CDs involve penalties for early withdrawal if funds are accessed before the 3-month term concludes. These penalties typically involve a forfeiture of a portion of the interest that would have been earned, often equivalent to one to three months’ interest. If the penalty exceeds the earned interest, it can reduce the original principal balance. Upon maturity, account holders generally have a grace period to decide whether to withdraw their funds or reinvest them in a new CD.

Key Considerations for 3-Month CDs

When evaluating a 3-month CD, prevailing interest rates are a primary factor. While the national average might be around 1.54% Annual Percentage Yield (APY), top-tier institutions can offer significantly higher rates, sometimes reaching 4.40% APY. Comparing these rates across different banks and credit unions is important to maximize potential earnings.

The impact of inflation on the real return of a fixed-rate investment warrants consideration. The annual inflation rate in the United States is approximately 2.7%. A 3-month CD offering a 4.40% APY would provide a positive real return, meaning the purchasing power of the money would increase even after accounting for rising prices.

A trade-off exists between a CD’s fixed, potentially higher, interest rate and the liquidity of funds. Money placed in a 3-month CD is inaccessible without incurring penalties for the term’s duration. This lack of immediate liquidity means these funds should be considered for short-term goals where access is not anticipated within the three-month period.

Evaluating Alternatives for Short-Term Savings

Other financial products offer options for short-term savings, each with distinct characteristics regarding liquidity, interest rates, and accessibility. High-Yield Savings Accounts (HYSAs) provide strong liquidity, allowing immediate access to funds without penalty. These accounts feature variable interest rates, which can fluctuate with market conditions, with some top HYSAs currently offering Annual Percentage Yields ranging from 4.46% to 5.00%. Most HYSAs are FDIC-insured and often have no monthly fees or minimum balance requirements.

Money Market Accounts (MMAs) are another highly liquid alternative, combining features of savings and checking accounts, including check-writing privileges. Like HYSAs, MMAs offer variable interest rates, with top rates presently between 4.40% and 4.80% APY. These accounts are FDIC-insured, although some may require higher minimum balances to earn the stated yield or to avoid fees.

Treasury Bills (T-Bills) are short-term debt obligations issued by the U.S. government, available in terms such as 4-week, 8-week, and 13-week maturities. They are considered very low-risk investments, backed by the full faith and credit of the U.S. government, though not FDIC-insured. Current yields for very short terms generally range from approximately 4.04% to 4.32%. Interest earned on T-Bills is subject to federal income tax but is exempt from state and local taxes.