CDs: Low Risk or No Risk?

Everything in life involves some type of minimal risk. If you want to sleep late, you risk being late for work, if you want to dine out, you risk eating more calories then your diet allots for and if you want to invest in a CD there are some extremely low risks associated with that type of investment.

CDs are considered a low risk (not a no risk) investment, as there are some scenarios where money could be lost when investing in a CD. For example, if you have a single CD with $275,000 worth of value, the FDIC will only recoup $250,000 worth of the lost investment if the bank closes. However, investing in multiple CDs with the value not to exceed $250,0000 can mitigate this risk.

An additional risk to the principal one takes is in the guise of early withdrawal penalties. Suppose you invested into a CD that matures in 2 years. When reading the terms, you realize that if you need to take your cash out earlier you will have to forfeit a penalty worth of three months of interest and that does not concern. However if your finances took a turn for the worse and you needed to access your investment after only one months interest was earned, you would be responsible for paying off the additional penalty out of the principal you initially invested.

Another possible risk may is tying your money into a long term, low yield investment. In economic downturns, CDs are a safe haven for investing your money. If during a downturn, you commit to a five-year investment that only yields a 2%-3% rate of return and the market bounces back, you would still need to keep your money invested or risk paying penalties.

Everything in life has a slight degree of risk associated with, as there is always a slight margin of error for unusual circumstances. However, investing in a CD is one of the lowest possible investment risks a consumer can take.