Pros and Cons of CD Accounts
The constant ebb and flow of decision making when it comes to where to put your money and how to invest it can be a bit time-consuming. Whatever your financial goal is, it is a good idea to weigh the pros and cons of not only your financial institution but also what features they offer you besides a standard checking or savings account.
Next time you are in your local bank or credit union, be sure to inquire about a certificate of deposit, or CD, as this might be the right type of easy deposit account and investment for you.
Key Pros and Cons of CDs
As with any account you start in a bank, credit union or online, CDs have both advantages and disadvantages. Here is an outline of some of the pros and cons of investing in CDs to help you decide if they are right for you.
Pros of CDs
- Safe investment: As CDs don’t fluctuate, you are guaranteed an interest payout. The CD term length — generally 12 months to 5 years — offers flexibility as you can choose how long you want to put your money in one.
- Higher interest rates: CD accounts earn compounding interest and the rates are typically higher than the fixed rates of savings accounts. Some are even tiered, depending on the length of the term, which will produce even higher returns on your investment.
- Flexibility: Not only is the term length flexible but you also have options as to what kind of CD you can invest in. These include no-penalty CDs, high-yield CDs, jumbo CDs, step-up CDs, bump-up CDs and brokered CDs.
Cons of CDs
- Low returns: Though the returns are steady, they are potentially lower than if you were to invest in higher-risk options such as stocks or bonds. If you are more risk-averse, CDs are a safer option, but you might be making less on your investment than you could.
- Non-liquidity: Once you put your money into a CD you will not have access to it until the account reaches maturity, which is at the end of the CD term. If you aren’t sure whether or not you may need to dip into the money you are considering investing, CDs may not be the best idea for you. If you do need to access your money before the account matures, you will face an early withdrawal penalty fee.
- Rate of inflation: If the rate of inflation grows faster than the interest on your CD, your return might not seem as high, especially for long-term CDs.
How CD Investments Work
If you are looking to invest in CDs, it is important to understand that CD accounts are considered a time deposit because you purchase them for a specific period of time, which can commonly range between 12 months to 5 years. If you redeem a CD before the maturity date, you’ll typically pay an early withdrawal penalty based on the terms of the agreement.
Though CD terms tend to be more strict than a standard savings account or money market account, they do have higher rates of return and will have more interest earned once the account has reached maturity.
Final Take: Are CDs a Good Investment?
Though CDs are a low-risk investment, be aware that the money you put into a CD can’t be touched for the term length or you could incur penalty fees. There is comfort in investing in something that is secure, safe and has guaranteed returns, especially in the hard-to-navigate economic landscape of today. It is always a good idea to invest or save money so you might want to consider CDs over savings accounts as they earn higher interest.
Explore More on CD Accounts
- Certificate of Deposit (CD): What It Is and Whether It’s Right for You
- How To Open a CD Account in 4 Simple Steps
- How Do CDs Work? Start Stacking Your Savings
- How Much Money Should You Keep in a CD Account?
- What Is a CD Ladder? What You Need To Know
- Best CD Accounts
FAQ
Here are the answers to some frequently asked questions about CD accounts.- Is a CD a good investment option?
- CDs are a good investment option if you are looking for a safe investment with guaranteed returns. The returns are steady but they are lower than other higher-risk investments such as stocks and bonds.
- How much will a CD earn in 5 years?
- The amount you earn on your 5-year CD depends on what APY your financial institution offers. For example, if the APY is 2.7% and you deposited $1,000 initially, you will have earned $142.48 in interest at the end of five years, giving you a total of $1,142.48.
- What is the highest paying 12-month CD?
- The amount you earn on a CD depends on factors such as term length and APY, for example, if you invested $500 for a 12-month CD, with an APY of 2.5%, you will have $12.50 in earned interest, giving you a total of $512.50.
- What is CD laddering?
- CD laddering is when you invest in a series of CDs and set each one to mature at a different time. This gives you periodic access to some of your money while the rest of it keeps earning interest. You can extend the ladder by rolling that money into another CD.
