What is a Liquid CD and Why Buy One?
Other than a different name, a liquid CD is really not much different than a regular Cd, with the obvious exception of having access to you capital at any time.
You may also ask, if that’s the case, wouldn’t it be the same as a money market account and savings account? The answer would be: absolutely yes – but with an exception we’ll get into in a moment.
So you don’t get confused, a liquid CD is still a CD. You buy it in the same way you would a regular CD, only now you have access to your cash when you want it.
Similar to a regular CD, a liquid CD will also be insured by the FDIC, but your allowed withdrawals will be penalty-free, in contrast to a regular CD.
One thing to keep in mind when looking at investing in a liquid CD is the terms offered by the various institutions. In some cases a bank will cap the amount you can withdraw, so the liquidity offered is limited. In these cases there should be a trade-off of a higher interest rate in comparison to other liquid CDs offered by other banks, otherwise there would be no incentive to buy one.
Other limitiations some banks include are how many withdrawals you can make within a specified time period, or some banks leave the entire withdrawal situation alone and allow you to withdraw however much you want when you want. Again, if there are restrictions, look for higher interest rates or don’t bother with them, as there’s no reason in the world to get a limited product that is offered by someone else with the same or higher interest rates with no limitations. If there’s no added incentive to buy a CD with limits on withdrawals, simply pass on it and buy one that allows unlimited withdrawals with similar interest rates.
Now the interesting thing about a liquid CD, is it might be marketed by a bank as a great alternative to a regular CD, and it is as far as liquidity goes. But the problem is there are already savings products available like a money market account and a regular savings account where you have liquidity already.
So why would you even want to consider a liquid CD if there’s no real obvious advantage to buying one? The answer is it has to do with interest rates.
If we’re in a time of interest rates falling, then acquiring a liquid CD instead of using a savings account or money market account makes sense, as it will protect you from lowered returns during that period, while having immediate access to your money.
But if interest rates are bottomed out, like they are as of this writing, a liquid CD really offers no value at all, and performs exactly the same a a money market or savings account. It won’t hurt you, but it won’t help you either. The only thing it could do is lock you in to lower interest rates, keeping you from enjoying better returns.
Consequently, in a low interest rate environment like we are in today, there is no value in a liquid CD, and if you think interest rates will rise sometime soon, you could miss out if you’re locked into a liquid CD rate.
On the other hand, if interest rates start to move up and look like they’ll start declining again, a liquid CD makes sense, and it is the only real time it adds any value to your savings strategy.
Tags: cds, certificate of deposit, certificate of deposits, liquid cds, saving strategies, savings, savings goals, savings plan, savings plans, short term savings
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