What is a CD Account?
A certificate of deposit (CD) is a unique savings vehicle, but are CDs worth it? Learn how and when to invest in CDs and why.
January 24, 2022
There are many different ways to save your money. You can invest it in the stock market, keep it in a savings account or buy a bond. You could also invest in a certificate of deposit (CD).
What is a CD account? A certificate of deposit is a financial product offered by banks and credit unions.
CDs are a safe way to slowly grow your savings over time. Understanding the pros and cons of CDs is important. If you want to know when to invest in CDs — and when to look elsewhere — this guide is for you.
How to invest in CDs
CD accounts are offered by most banks and financial institutions. Anyone can invest in a CD from their bank or from any number of online financial institutions.
The money that is invested is locked up for a certain period of time and starts to earn interest immediately.
Some banks have minimum deposit amounts, while a few have no minimum at all.
CDs also have a specific term — a certain amount of time for which they must be kept in the bank. Typically, the CD owner can’t withdraw funds before the end of the term without paying a penalty. However, some banks offer no-penalty or liquid CDs that waive this requirement.
Common CD term lengths include:
12 months (1 year)
24 months (2 years)
36 months (3 years)
60 months (5 years)
A CD is technically a deposit account, so you can deposit money into it and later withdraw, after the established term. However, there is a minimum amount of time that you must keep the money invested. As such, CDs function more closely to bonds than to normal checking or savings accounts.
In other words, you essentially “buy” a certificate of deposit, and the bank pays you interest until the end of the predetermined period at which point you can withdraw all the money penalty-free, along with your interest.
When to invest in CDs
When are CDs a good investment, and when should investors look elsewhere?
Let’s consider some of the main benefits of CDs:
They are insured and extremely safe
They are predictable and stable
They have well-defined terms — e.g., 3 months or 5 years
Looking at this list, you may be able to deduce which situations would benefit from an investment in a CD. Here are a few examples.
When you have an upcoming expense
If you have a wedding coming up in two years, or you’re planning a dream trip in nine months, CDs present a good option for these short-term and medium-term financial goals.
It may not be a good idea to buy stocks for such a short time frame, since the stock market could go up or down, or both, in the short term.
In this situation, you know when the expense is coming up, so you can invest in a CD for exactly that length of time.
If you value safety and predictability over higher returns
If you want to maximize the return on your investment, CDs may not be a wise option, as they pay fairly low interest rates. But if your priority is protecting your money and avoiding risks, CDs are excellent.
They are safe, stable and FDIC-insured up to $250,000 per bank. CDs have the same insurance and protections as your checking account, so you can rest assured that your investments are safe.
If you already have substantial savings invested
Many investors will be better off by putting their money in the stock market — at least when it comes to long-term investment. But if you already have a lot of money invested in higher-risk assets, like stocks, ETFs or cryptocurrencies, then it might make sense to park some funds in a low-risk asset like a CD.
If you just want to protect your wealth
If you are retired and have a comfortable nest egg, you may no longer need to grow your money in order to fund your lifestyle and your future. In this case, it might make sense to reduce the riskiness of your investment portfolio, and CDs could play a role in that.
Are CDs worth it in 2022 and beyond?
In today’s economy and interest-rate environment, are certificates of deposit worth it?
It’s no secret that interest rates for CDs are very low. One-year rates are well under 1%, and even 5-year rates are right around the 1% mark.
And with inflation rates on the rise, these low interest rates look even less appealing.
CDs still have their place, though. Their interest rates are higher than the average checking or saving account, and longer-term CDs can also offer higher rates than high-yield savings accounts.
Ultimately, the decision of when to invest in CDs, or to invest in them at all, is up to you.
Mastering your money
If you’re reading this article, chances are that you’re on the right track toward a brighter financial future. To learn more about personal finance and get some tips to help you on your way, check out The Score blog from Tally.
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