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The constant ups and downs of decision-making can take a little while when it comes to where and how to invest your money. We recommend that you also weigh the features offered outside of your checking or savings account.
Next time you go to your local bank or credit union, ask about a deposit certificate or CD. This could be the right kind of simple savings account and investment.
Major advantages and disadvantages of CDs
Like any bank, credit union, or any account you start online, CDs have both pros and cons. Here’s an overview of the pros and cons of investing in a CD so you can decide if it’s right for you.
Advantages of CDs
- Safe investment: Since the CD does not fluctuate, interest payments are guaranteed. CD terms (typically 12 months to 5 years) are flexible and you can choose how long you want to invest in a single CD.
- Higher Interest Rate: A CD account earns compound interest and the interest rate is higher than the fixed interest rate of a savings account. Some are stratified according to the length of the period. This gives you an even higher return on your investment.
- Flexibility: Not only is the length of the term flexible, but you also have options for the types of CDs you can invest in. This includes non-penalty CDs, high-yield CDs, jumbo CDs, step-up CDs, bump-up CDs, and mediated CDs. .
Disadvantages of CDs
- Low return: Returns are stable, but can be lower than when investing in riskier options such as stocks and bonds. If you are more risk averse, CD is a safer option, but you may get less return on your investment.
- Illiquidity: Once you deposit money into your CD, you will not be able to access it until your account reaches maturity, which means your CD term ends. If you’re not sure if you should invest the money you’re considering investing, a CD may not be the best idea. If you need access to your funds before your account expires, you will incur an early withdrawal penalty.
- Inflation rate: If the rate of inflation grows faster than the rate of interest on CDs, especially for long-term CDs, the returns may not seem very high.
Structure of CD investment
If you are considering investing in CDs, it is important to understand that CD accounts are considered fixed deposits. This is because you buy for a specific period of time, usually ranging from 12 months to 5 years. If you redeem your CDs before the maturity date, you will generally pay an early withdrawal penalty under the terms of the contract.
CD terms tend to be more stringent than standard savings or money market accounts, but they offer higher returns and more interest once the account reaches maturity.
Final Round: Are CDs a Good Investment?
CDs are a low-risk investment, but please note that money invested in CDs cannot be changed during the term. Failure to do so may result in a penalty fee. Investing in something that is safe, secure, and has a guaranteed return can be reassuring, especially in today’s difficult-to-navigate economy. Investing or saving money is always a good idea. Therefore, we recommend that you consider a CD, which offers higher interest than a savings account.
Frequently Asked Questions
Here are answers to frequently asked questions about CD accounts.
- Are CDs a Good Investment Option?
- CDs are a good investment option if you are looking for a safe investment with guaranteed returns. Returns are stable but lower than other risky investments such as stocks and bonds.
- How much does a CD make in 5 years?
- The amount you get for a 5-year CD depends on the APY offered by your financial institution. For example, if your APY is 2.7% and you initially deposit $1,000, you will earn $142.48 in interest after 5 years for a total of $1,142.48.
- What is the best 12 month CD?
- The amount you earn in CDs depends on factors such as length of term and APY. For example, if he invests $500 in a 12-month CD and has an APY of 2.5%, the interest will be $12.50 for him, for a total of $512.50.
- What is a CD ladder?
- CD laddering is investing in a set of CDs, each set to mature at a different time. This gives you regular access to a portion of your money, while the rest continues to earn interest. You can roll that money into another CD and climb the ladder.
