Why you should consider investing in a Certificate of Deposit (CD)

Jennifer Dier

February 7, 2017

Are you looking for a low-risk tool that allows you to earn more interest than a regular savings account? Consider investing in a Certificate of Deposit (CD). Read on to learn how CDs work and determine if a CD is the right savings option for you.

What is a CD?

A Certificate of Deposit is a type of account known as a “time” deposit. That is, you commit to leaving your money in the account for a term, or specific amount of time. CDs come in many different term lengths; some of the more common ones are 6-month, 1-year, 2-year, 5-year and 10-year. As a reward for keeping your money in the account for the entire term, banks commonly pay a higher interest rate than a regular savings account. Generally, the longer the term, the higher the rate that is paid.  Bank issued CDs are considered safe because they are covered by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. 

 

Save and earn interest wtih a CD

 

Can I get my money if I need it?

You can close a CD before the end of the term, but you’ll likely pay an early withdrawal penalty if you do. Early withdrawal penalties are typically three to six months of interest, so make sure you understand how much the penalty is before closing the CD. You may find that in the long run, it may make more sense to keep the CD open until the end of the term.  

CD Laddering

What if an emergency happens and you need access to some of the money you’ve deposited in a CD? Or, what if interest rates go up during your CD term and you’d like to take advantage of the higher rates? CD Laddering is a great way to address these concerns by having different CDs maturing at different times. Here’s how CD laddering works. Say, for instance, that you have $10,000 to invest in CDs. To build your CD Ladder, you could spread the amount among CDs with different term lengths:

$2000 in a 1-year CD
$2000 in a 2-year CD
$2000 in a 3-year CD
$2000 in a 4-year CD
$2000 in a 5-year CD

Rather than placing all of your savings in a single CD term, distribute portions of your savings to various CD terms in order to earn higher rates while also ensuring that some of your CDs will mature soon. This can be a particularly beneficial strategy in a rising rate environment. 

Investing in CDs isn’t always the fastest way to grow your money, but it is a safe and secure savings tool that could be an important component of your overall financial plan. Our bankers are eager to help you determine the right savings strategies for your needs. Stop by a branch today, or call 1-800-448-8812 for information about Certificates of Deposit or any of our other banking products and services. 

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Topics: Personal Finances, Family Finances

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