Certificates of deposit are a less exciting investment than the stock market or other investing methods that gain more attention, but they’re also a durable option that many investors appreciate. Like any investment, CDs have pros and cons worth considering before deciding what’s best for your financial needs.
The Benefits of Certificates of Deposit
They offer better returns than a savings account. Even with a high-yield savings account, you can often find certificates of deposit (CDs) with higher return rates for your money.
Your returns are predictable. One of the comforting advantages of a CD is that you will be locked into the term’s interest rate. When you invest in the CD, you will know exactly how much money you’ll be getting back at the end of the terms.
You have a lot of options. There are certificates of deposit available at financial institutions everywhere so that you can shop around for the best deal. This means looking at the highest interest rates for your return. It also means that you can find the timeline that works best for your needs.
It’s a safe option. Investing in the stock market comes with all kinds of risks. A certificate of deposit is done at a federally insured institution and is a predictable and safe way to invest your money.
The Drawbacks of a CD
Your money will be temporarily inaccessible. When investing with CDs, you are locking your money into the certificate of deposit until an agreed-upon date. While you could cash out in an emergency, this takes time and loses your returns. With a high-yield savings account, you can still have access to your money at any time.
Returns are low compared to other investment methods. The risk is also lower, but CDs are not the best option if you’re looking for significant returns.
There is a risk of inflation. If you put money into a five-year CD, it is possible that the low interest rate on your returns could be less than the inflation rate. Ideally, this won’t be true, but it happens.