Four Benefits of Investing in a Certificate of Deposit | Banking Matters
The Value Of A Certificate of Deposit
For those looking for a way to manage and protect their savings, one of the first questions to answer is which option will make their money work smarter? There are many, many ways to invest and a variety of financial products available – from less risky products such as certificates of deposit to more volatile methods such as the stock market. Although CDs may seem fairly predictable, their stability and dependability are why some find them so compelling.
What is a Certificate of Deposit?
Commonly referred to as a CD, a certificate of deposit is a deposit account with a fixed interest rate that is usually higher than a regular savings account. CDs typically have a fixed-term length and a fixed date of withdrawal, known as the maturity date. CDs generally have a minimum dollar balance that must be invested and sometimes a maximum dollar amount you can invest.
What are the benefits of investing in a Certificate of Deposit?
CDs offer safety and peace of mind.
CDs are a relatively safe investment. CDs from federally insured banks are guaranteed to return the principal and interest earned at maturity. Even if the financial institution is forced to close, your principal and interest up to insured limit are safe. The standard FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category which includes CDs. Depending on ownership, CDs can be insured for more than the standard $250,000.
CDs offer better returns than traditional savings accounts.
While both CDs and savings accounts are a worthwhile part of an overall savings plan, banks typically pay CD investors a higher yield in exchange for keeping their cash in the account for a set period of time.
CDs have fixed, predictable returns.
CDs can be counted on to deliver a specific yield at a specific time. Even if interest rates fall in the broader economy, your rate will remain constant for the full term. Guaranteed rate of return makes it easy to calculate exactly how much interest will be earned.
CDs come in a wide selection of terms.
CDs are available in a variety of maturities and yields and are offered by most banks and credit unions – both online and physical branches. Terms typically range between three months and five years. This diverse set of options allows investors to choose a strategy that best fits their financial goals.
As with any investment and major financial decision, it is important to examine both the advantages and disadvantages to make an informed decision. There are a couple drawbacks to CDs worth noting. CDs have limited liquidity, so owners cannot easily access their money if an unanticipated need arises. There is usually a penalty for early withdrawals which can even mean loss of principal. In addition, there is the risk that the rate of inflation may outpace the rate of return you’re earning on your CD. However, if you’re looking for a secure way to grow your money, a CD account may be a sound investment worth considering!
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