Certificates of Deposit: Bear-like Security or Financial Slumber?

When you think about certificates of deposit (CDs), a hibernating bear probably isn’t the first thing that comes to mind. But just as a bear sleeps safely through the harsh winter, investing in CDs allows your money to “rest soundly” in volatile financial markets and “wake up refreshed” when the term ends—without “losing one-third of its bulk.” In fact, keeping your hard-earned money tucked away in CDs can produce significant gains.

Couple deciding on a CD

How CDs Work

A certificate of deposit is a type of savings account that typically offers a higher rate of return in exchange for your commitment to leave the deposited funds untouched for a set period. Most financial institutions offer CD terms as short as six months and as long as five years—the longer the term, the higher the guaranteed rate of return. CD account owners deposit a lump sum into a designated account, where the money will “hibernate” while accumulating interest. At the end of the CD term—the “maturity date”—the account owner receives the initial deposit back, plus interest earnings.

The Pros of CDs

CDs offer multiple benefits that account owners can leverage to achieve short- and long-term financial goals. Some advantages include:

•              Guaranteed rate of return

•              NCUA insurance for up to $250,000

•              Potential for daily compounding

•              Low minimum-opening-balance requirements

•              Freedom to add to the initial deposit during the term

•              Support for specific savings goals based on personal timelines

•              Higher interest rates compared with regular savings accounts

The benefits of placing your money in a CD can be significant.

The Cons of CDs

However, this savings account alternative isn’t for everyone, and based on your financial goals, other factors might make CD investing less attractive. Potential drawbacks include:

•              Taxable interest earnings

•              Financial penalties for early withdrawals

•              Unavailability of funds for the entire term (up to five years)

•              Lower rate of interest compared with other types of investments

•              Interest rates potentially lower than the current inflation rate

Weighing the pros and cons of CDs is a great way to assess how this savings vehicle might balance your investment portfolio.

Questions to Ask Before Opening a CD

CDs offer a safe way to grow your savings, but it’s still wise to evaluate your finances before placing money in an account that forbids access for an extended period. Some crucial questions include:

•              What is your CD investing goal?

•              Since you won’t be able to access your deposit without paying a
                penalty, how will you cover a financial emergency?

•              Are there special events, travel, or other purchases you might
                need to make during the CD term?

Other questions might be necessary, too, based on your specific financial situation.

Financial hibernation is one option to consider when weathering an economic storm. Although CDs seem motionless during their designated term, they offer a guaranteed way to awaken your bank account. After a period of immobile slumber, your finances will roar back to life! Consider how this safe haven for your money could support your financial goals.

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