If you’re looking for a safe way to invest your money, you may be asking, “Should I open a CD?” The answer depends on your financial situation and investing goals.
Before you can decide whether a CD is right for you, it’s important to understand the basics of what certificates of deposits are and how they work. Read on to explore the features of CDs and better understand when and why they may be a beneficial choice.
What Is a Certificate of Deposit (CD)?
Certificates of Deposit, or CDs, are savings products offered by many financial institutions. When you open a CD, you agree to invest a certain amount of money for a specified time period in return for a fixed interest rate. Once this time period is over, you’ll get your money back plus interest. If you withdraw the funds before the agreed-to period, however, you face potential penalties.
CDs earn a relatively low rate of return compared to many other types of investments but remain a popular choice for those who have set aside funds they want to invest safely during a short season of time.
Certificate of Deposit vs Savings Account
For those unfamiliar with CDs, they are easily confused with savings accounts. So, what is the difference between a CD and savings account?
While high-yield savings accounts and CDs are both secure ways to store your money while earning a return, they have one main difference – the holding period. In most cases, if you have an emergency expense, you can withdraw funds from your savings account without a penalty. If you take funds out of your CD before the term is up, however, early withdrawal penalties may lessen your earnings.
Learn More: CDs vs Money Market Accounts: Which Should You Choose for Your Savings?
What Are the Requirements of a CD?
Most CDs have a minimum to open, so you’ll be required to invest at least that amount to get started. Once your CD is set up, all that’s left to do is wait – then, at the end of the term, collect your earnings.
When you decide to open a CD, it’s important to research the best banks for high interest rates and choose a CD with an investment term that meets your needs. According to CNBC, most CDs require the holder to wait between three months and five years before withdrawing their money.
Here’s an example: Let’s say you open a 5-year CD with an interest rate of 1% and an initial deposit of $10,000. At the end of your waiting period, you’ll receive your balance back with interest, for a total of $10,510.10. Your interest earnings will total $510.10.
When Is a Good Time to Open a CD?
Here are a few situations in which a CD may be a good fit for you:
- Average CD interest rates are high
- You’ve already saved an emergency fund that covers three to six months of expenses
- You have savings for a specific purpose – like a car or house – that you won’t need for a while
- You have excess savings funds you won’t need for a while
- After rate-shopping, you believe a CD will offer better returns than a savings account
Before you open a CD, it’s also important to weigh the benefits and drawbacks to determine whether it’s right for you. Here are a few pros and cons of CDs:
Pros of CDs
- Simple and secure: CDs are easy to open and don’t require a lot of maintenance. Plus, if you choose an institution that’s FDIC-insured, you can enjoy an extra layer of protection.
- Fixed returns: Unlike some stocks or bonds, CDs are a low-risk investment. Because they offer fixed returns, you know exactly how much interest to expect right from the start.
- Wide variety of options: Many financial institutions offer CDs with a variety of rates and terms. Research the best banks for high-interest rates to find competitive offerings.
- CD Laddering: You can open CDs with varying terms, for example, 6-month, 2-year and 5-year CDs, then enjoy staggered returns. If you choose, you can roll your earnings into new CDs for even greater returns.
- Avoid monthly fees: Unlike many savings and money market accounts, most CDs don’t charge monthly fees to maintain.
Cons of CDs
- Waiting period: While you can choose your CD term, you will have to wait for the duration of the term before withdrawing your funds if you want the full return.
- Comparatively low returns: Earning a fixed rate of interest is a major benefit of CDs, but it also means your return won’t rise with the market like some stocks and bonds. On the other hand, your return will remain consistent even if the market drops.
- Potential inflation losses: If you choose a CD with a longer fixed term, annual inflation rates may make your return less valuable over time.
Earn High-Interest Rates With a CD
One of the most important steps in opening a CD is finding one with a rate and terms that fit your savings goals. When it comes to choosing the best possible option, start by choosing a reasonable waiting period based on your budget. Then, research financial institutions to determine which one offers the most competitive rate.
SouthEast Bank offers several CD promotions to help you maximize your money. Learn more using our online options or by visiting your nearest branch today.
