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What Is a Liquid Certificate of Deposit (CD)?

Byline profile imageEdited by Mark Henricks
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Byline profile imageEdited by Arturo Conde, CEPF®
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Unlike traditional CDs, which require you to lock in your money for a fixed term, a liquid CD offers the flexibility to withdraw funds without incurring penalties. This type of CD can be an attractive choice for savers who seek the security of a CD but also value the ability to access their money when needed. Typically, liquid CDs offer slightly lower interest rates when compared with their fixed-term counterparts, reflecting the added convenience of liquidity. Compared to standard savings accounts, they provide a higher return and somewhat more limited liquidity.

A financial advisor can help you pick liquid CDs and other financial investments that fit with your financial plan.

How a Liquid CD Works

A liquid certificate of deposit (CD) combines the benefits of a traditional CD with the flexibility of a savings account. Unlike standard CDs, which lock your money for a fixed term, liquid CDs allow you to withdraw funds without incurring penalties. The flexibility often comes with a trade-off in the form of lower interest rates when compared with conventional CDs.

Generally, the interest rates on liquid CDs are higher than savings account rates but lower than fixed-term CDs. The rates can vary depending on the financial institution and the length of the CD term. Most liquid CDs have terms ranging from a few months to a few years. 

A liquid CD with its balance of security and accessibility can be a useful solution for someone who wants to safeguard their principal while still having the option to access their funds if needed. Liquid CDs can serve as a component of a diversified portfolio, providing a predictable return without the volatility associated with stocks or mutual funds. 

Pros and Cons of Investing in a Liquid CD

Unlike traditional CDs, liquid CDs allow investors to access their funds without incurring penalties. While that’s an important plus, like any financial product they come with advantages and disadvantages. 

Pros:

  • Flexibility in accessing funds: A key benefit of a liquid CD is the ability to withdraw funds without early withdrawal penalties. This allows investors to access their money if needed, providing more liquidity when compared with traditional CDs.
  • Higher interest rates than savings accounts: Liquid CDs typically offer higher interest rates compared to regular savings accounts. This makes them an appealing option for those looking to earn more on their savings while still maintaining some level of access to their funds.
  • Insurance: Like other CDs, liquid CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits. This insurance provides a layer of security, protecting your investment even if the bank fails.

Cons:

  • Lower interest rates than traditional CDs: While liquid CDs offer more flexibility, they often come with lower interest rates compared to traditional CDs.
  • Minimum balance requirements: Many liquid CDs require a minimum balance to open and maintain the account. This requirement can be a barrier for some, particularly those who are investing as beginners.
  • Limited withdrawal options: Although liquid CDs allow penalty-free withdrawals, there may still be restrictions on the number of withdrawals you can make. 

Who Should Consider a Liquid CD?

An investor looking up alternatives to liquid CDs.

A liquid CD may be appropriate for savers who want to earn more interest than they would in a regular savings account but still need occasional access to their funds. This includes individuals who are building a short-term cash reserve or emergency fund and want some flexibility without completely sacrificing interest earnings. The penalty-free withdrawal feature can be useful in situations where financial needs may arise unexpectedly.

Retirees or conservative investors may also consider liquid CDs as part of a larger income strategy. These products can serve as a low-risk holding that provides modest returns while keeping principal protected. Liquid CDs offer more stability than equities or bond funds, and their FDIC insurance adds an additional layer of security for those prioritizing capital preservation.

Investors who are waiting for better market conditions or other investment opportunities may use liquid CDs as a temporary place to park cash. Rather than leaving money idle or in lower-yielding accounts, a liquid CD can help preserve purchasing power while maintaining flexibility. This approach can be especially relevant during uncertain interest rate environments when locking into long-term products feels premature.

Alternatives to a Liquid CD

When considering alternatives to a liquid CD, savers have a number of options. Here are five common ones to consider:

  • High-yield savings accounts typically offer higher interest rates than traditional savings accounts, allowing your money to grow while remaining easily accessible. Unlike a liquid CD, which may have restrictions on withdrawals, funds in a high-yield savings account can be withdrawn without restriction.  
  • Money market accounts (MMAs) combine features of  savings and checking accounts, offering competitive interest rates along with limited check-writing capabilities. 
  • Treasury securities represent a more stable and reliable alternative. These government-backed securities include Treasury bills, notes, and bonds, each with varying maturity periods and interest rates. 
  • Bond funds pool money from multiple investors to purchase a variety of bonds, providing exposure to different sectors and credit qualities.
  • CD ladders involve purchasing multiple CDs with staggered maturity dates, allowing you to access a portion of your investment at regular intervals. 

Bottom Line

An investor reviewing her investment plan.

A liquid CD can offer security, a competitive return and flexibility. And, unlike traditional CDs that lock your money for a set time, liquid CDs let you withdraw funds without penalties. This gives investors access to their money if needed, while still earning higher interest than a regular savings account.

Tips for Investment Planning

  • A financial advisor can help you create a personalized investment plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you want to know how much your investments could grow over time, SmartAsset’s free investment calculator could help you get an estimate.

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