Are CDs Still Worth the Investment?

If you are looking to open a certificate of deposit (CD) anytime soon, you need to act fast. Your window of opportunity for getting a great rate may be closing. With the right systems, you can save and invest for your future. Doing so can help you develop a solid footing for your personal finances.

In this guide we will breakdown what a certificate of deposit is and if it is worth it for you.

What is a Certificate of Deposit?

A Certifacte of Deposit is a type of bank account that allows you to save your money for a set amount of time called a term. CDs usually have a fixed savings interest rate. A fixed interest rate won’t change over time. As a low-risk investment, CDs won’t offer any surprises: You will know the amount of money you will have earned once the term has completed.

Examining the current economic conditions and your personal financial situation can help you determine whether a CD is a worthwhile investment. The ultimate allure of a CD is its certainty. Because the rate is fixed, it takes the guesswork out of what future earnings will look like. Plus, most banks pay higher rates on CDs than they do on savings accounts.

Do CDs Pay Interest Monthly?

The terms of the CD will determine when the interest is paid. In most situations, the interest earned is paid in full at the end of your CD term. A term can be anywhere between six months and five years.

When shopping for a CD, it is important to look at the terms and compare them to your current financial situation. Some CDs exist that do pay out monthly, but they only pay out the interest earned that month — not what you will earn over the term.

Can You Lose Money in a CD?

The best thing about Certificate of Deposits is that they only cause you to lose money through your own actions. Unlike stocks, CDs will guarantee a certain amount earned by the end of the term. As long as you leave your money in the CD the entire length of the term, you won’t lose money in a CD.

The other thing that makes CDs worth it from a risk standpoint is that they are insured by the Federal Deposit Insurance Corp. So, even if the bank fails, you won’t lose what you invested.

Best Time to Invest in CDs

No matter what kind of CD climate you’re in, CDs are still worth it as a savings product. They offer stable and guaranteed returns no matter what (unless you make an early withdrawal) since you lock in your rate at opening. This differs from savings or money market accounts whose rates are variable and can change without warning.

Plus, CDs can serve several savings goals. For instance, they’re a safe place to stash your extra cash if you’ve already maxed out your other savings accounts. You don’t have to worry about moving your money around between accounts if they’re parked in an FDIC-insured CD.

CDs are also great for long-term savings since they lock away your money for the entire term until maturity. So if you want to set aside money for a down payment in five years, for example, placing money in a CD can result in guaranteed earnings. Plus, it helps you avoid dipping into those funds, lest you incur a hefty early withdrawal penalty.

CDs Work Best in Certain Situations

Top CD rates are typically higher than the best rates on savings accounts. The best five-year CDs, for example, can come with rates near or even above 3%. Rates on the best savings accounts, meanwhile, currently max out at about 2%.

But just because CDs tend to offer some of the highest guaranteed returns doesn’t automatically make them the best home for your savings or investments.

CDs can work well in the following three scenarios:

• Protecting savings: These may include saving for a down payment on a home or car. Whatever the goal, the money won’t be used for years and can stay safely out of reach in CDs. (If you have savings goals but don’t want to lose access to your money, consider high-yield savings accounts instead.)
• Building short-term wealth: CDs with short terms, such as one or two years, can make sense if there’s a plan to later invest that money. For example, if you want to invest a large sum in the market, you might spread out when you buy stocks or funds over time using a popular investing strategy called dollar-cost averaging. The money waiting to be invested could go into CDs to earn more interest than it would in a regular savings account.
• Ensuring returns without risk: Investing in long-term CDs is generally best for people, typically retired, who want to avoid risking their money in the stock market. They also want to stop their savings from eroding because of inflation.

When are CDs Not Worth It?

Of course while CDs work for some savings goals, they won’t be worth your time in other situations. For one, don’t open a CD if you need quick and flexible access to your money. CDs lock your money in for the whole term, whether that’s six months or 10 years. Within that time, you can’t withdraw money without facing a penalty that’s often worth more than your withdrawal.

So if there’s a chance you might need that money in the short term, avoid opening a CD. Instead, consider high-yield savings accounts, which allow for more flexibility, especially if you’re creating an emergency fund where you’ll need fast access to your money in a pinch.

You also may not want to open a CD if you’re in an increasing-rate climate. It helps to shop for CD rates before really committing. If you’re noticing that banks are competing for the highest rate and continue to boost their rates, then perhaps wait it out.

Conclusion

Understanding the mechanics of investing in a CD can help you both plan and determine whether this type of investment is right for you. If your ultimate goal is to build up your savings while still being able to take care of emergencies, CDs can take out a lot of the guesswork surrounding your financial future. CDs are worth it when you’re seeking a virtually risk-free investment that you can count on.