Pros and cons of investing in CDs
Are you considering a Certificate of Deposit (CD) as a savings option? As with any financial decision, doing research ahead of time will allow you to choose the product that best meets your goals.
A CD is a savings account that has a fixed interest rate and fixed date of withdrawal, known as the maturity date. It’s an easy, straightforward way of saving money and earning interest with little or no associated risk, especially if you don’t need to use the funds immediately. Let’s take a look at the pros and cons of investing in CDs.
- Security. The primary advantage of investing in CDs is security. CDs are backed by the FDIC, making the product one of the safest investments out there. There is a limit on the insurance, so make sure to consult with your banker to find out how much coverage you have.
- Fixed, predictable return. Because your money is locked up for a specified period of time, CDs usually pay higher interest rates then other, liquid, savings options. In addition, at maturity during the CDs 10-day grace period, funds can be added to the CD or withdrawn without a penalty.
- Variety. Most financial institutions offer a wide variety of CD products with various rates and maturity options to meet your investment goals.
Here at Bank of the West we offer a range of CDs which gives you choices based on your current needs.
- Early withdrawal penalties. Because CDs have a set maturity date, account owners cannot easily access their money if an unanticipated need arises. If a withdrawal must be made, a penalty will likely be assessed. That penalty typically comes in the form of sacrificed interest. Sacrificed interest is based on the term of the CD and the amount being withdrawn.
Because of this, it’s always a good idea to keep some funds in a liquid account, such as a money market savings account which can be accessed when needed, without having to pay a penalty. However, interest that has been paid to the CD during the term is always available for withdrawal without penalty.
- CD interest rates do not rise during the account term. If CD interest rates increase, your existing CD rate won’t because the interest rate is fixed for the term of the CD.
- Non-transferable funds. While your money is in a CD, you can’t transfer these funds into another account until the CD matures.
CDs can be a good investment for any person. And while you may not be able to make a fortune from CDs, they usually provide a higher rate of return than money market savings accounts. I hope you learned something new about CDs and if you have any questions, please consult with your local banker.