Is It Worth Investing in CDs?
What is the best way for you to save money besides a standard saving account or event just stuffing your money into a mattress? Though both viable options, if you are looking for a better way to build your personal finances, CDs could be a good investment for you. With the right systems, you can save and invest for your future
If you are wondering if CDs are worth it, it cannot hurt to look into what they are and how they could work for you. Ultimately, the answer boils down to both the current economic climate and the financial position of the individual. Learn more information about CDs and what they look like as an investment option today.
What Is a CD?
A CD 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.
Why Are CD Interest Rates Up?
CD interest rates, though not technically linked directly to the Federal Reserve, do tend to have a correlation between the rise and fall of the Fed rate. In other words, when the Fed rate goes up so do CD interest rates.
When it comes to raising interest rates in the United States the buck of responsibility stops with the Federal Reserve. It can change interest rates and often does so to support economic growth or stave off economic recession.
Simply put, interest rates are going up because of inflation. The Federal Reserve increases interest rates to slow down inflation by slowing down economic growth, and when these rates go up so to CD interest rates.
Are CDs Worth It?
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.
For those who live paycheck to paycheck and want to make some additional money through investing, however, CDs might not be the way to go. CDs require you to lock up your money for some time, so pulling the money out early can have consequences. While a CD does act much like a savings account, you will not have access to it early without paying some sort of penalty.
Why CDs Are a Good Investment
CDs are beneficial for those who have an excess amount of savings and want to invest in something low-risk. CDs have been around since the early periods of banking, and other investment options have come into existence since then. Because they are one of the older options available, many question their relevancy moving forward.
Pros and Cons of Investing in CDs
| Pros | Cons |
|---|---|
| Safe and secure way to set aside money with guaranteed returns | Penalties for withdrawing CD funds before maturity |
| Typically higher interest rates than a standards savings account | Less liquidity than a standards savings account |
Can You Lose Money in a CD?
The best thing about CDs 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.
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, which is not what you will earn over the term.
Do CDs Build Credit Overall?
When making any kind of new financial decision, it’s always important to consider how it will affect your credit rating. When it comes to CDs, it’s worth asking whether or not this type of investment is worth it to you.
On a basic level, CDs don’t directly affect your credit. Some people, however, utilize them to inadvertently increase their rating. This is done by taking out a secured loan against the CD. As you pay the loan back, your credit score will increase. Ultimately, however, investing in a CD alone will have neither a positive nor a negative effect.
Final Take
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.
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Casey Bond contributed to the reporting for this article.
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