Certificates of deposits (CDs) are one of the most common and safest investment options available. However, like many types of savings accounts, a CD does possess its own set of risks. A service provided by banks, a CD allows investors to earn more interest on their money than is typically possible with a regular savings account. Banks often provide investors a higher annual percentage yield (APY) to hold funds for a period of months or years, known as a “term.”
Who Is an Ideal Candidate for a CD?
While a certificate of deposit can be beneficial in a variety of ways, it is not for everyone. If you have a sum of money that you are certain you will not need during the desired term length, then a CD may be a viable savings option for you. CDs often offer higher interest rates than traditional savings products.
This why it is so important to do your homework and ensure that you are receiving the best option for your investment.
What Are the Risks of CDs?
What makes CDs so popular is that they are relatively low risk. However, there are certain things you should understand about CDs to keep yourself protected from certain risks. Unlike a regular savings account that allows you to withdraw and deposit funds at your convenience. With a CD, you must keep your money in the bank for a set period of time also referred to as a “term”. If you choose to withdraw your funds before the term is reached, you may be subject to pay a penalty..
Another risk you may face deals with changing interest rates. If interest rates go up over time, your CD may still be locked at the lower rate. One way to ensure that you benefit from raising interest rates is through a concept called “laddering.”
With laddering, your funds are spread out over multiple CDs with staggering maturity dates. This concept allows you to get the most from your funds while also giving you access to money at various points.
What are the Benefits of CDs?
Safety is one of the biggest benefits of a CD. Most certificates of deposit are ensured by the Federal Deposit Insurance Corporation up to the maximum allowed by the law. You should always inquire if your financial institution is FDIC insured. This can give you peace of mind that your money is well protected.
The next benefit of using a CD is its fixed rates. Unlike the stock market or real estate market which can be quite unpredictable, CDs are offered at fixed rates for fixed terms. This ensures slow and steady interest growth that you can depend on.
In addition, while CD fees can vary from bank to bank, most financial intuitions charge very little or nothing to open and maintain an account. Any fees that you pay throughout the term of your CD should be indicated at the time of the agreement. You should always be sure to carefully read terms and conditions of your CD prior to signing.
Where Can I Learn More About CDs?
A certificate of deposit can be a useful tool for both short-term and long-term savings. While there certainly are risks involved in this popular savings option, most financial experts would agree that CDs are one of the safest investments you can make. CDs are available for various terms and maturities to ensure that each investor finds a CD that meets their unique needs. Before settling on a certificate of deposit, do your research to find a product that works best for you. For more information about CD’s, terms and conditions, or help setting up a CD, please contact FVCbank to speak with an experienced banker.