Used as a savings instrument, a CD (Certificate of Deposit) offers a fixed interest rate that is guaranteed. And it’s usually a small step up from what savings accounts offer, particularly in the current market. (Historically, a CD account generally yielded a noticeably higher rate of interest than that paid with a typical savings account.) Plus, they are generally considered a risk-free investment because they are backed by the Federal Deposit Insurance Corporation (FDIC).
There are definite pros and cons associated with investing in a CD. Before deciding whether a CD is the right option for you, consider the following:
- Keep in mind that when you save with a CD that your money is “locked away.” If you need the cash before the maturity date, you will end up paying a penalty for early withdrawal. So make sure to choose the amount and term of the CD based on your current and future use of the money you plan to deposit.
- Most CD interest rates are fixed. However, as your CD matures, inflation can affect the return you receive on your investment. If inflation rises, the real return on your CD falls and vice versa. See this article for more on inflation’s impact.
- You can choose how frequently you receive interest payouts from the CD (e.g. monthly, quarterly). Or alternatively, you can choose to collect all of the interest when the CD matures. Remember that most CD’s with higher interest rates are “locked” for a longer time period.
- Always shop around for the best rates. Bankaholic has hundreds of up-to-the-minute articles on CD rates all over the country.
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