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Certificate of deposit: Pros and cons

minute read

    There are many ways for savers to put their money to work. One option is a certificate of deposit (CD), a type of deposit account that typically offers fixed earnings and typically a higher interest rate than a traditional savings account. To discover if CD accounts are right for you, let's look at some certificate of deposit pros and cons you may want to keep in mind.

    Certificate of deposit advantages

    If you’re looking for a way to potentially estimate the earnings on your deposit, a CD account might be worth considering. Here are some of the potential pros of a certificate of deposit account:

    Predictable earnings

    Most CD accounts offer fixed interest rates, which can help you calculate what your earnings may be at the end of their term. This might make certificates of deposit a possible strategy for those who want an anticipated earning on their deposit within a specific timeframe.

    Lower market risk

    As certificates of deposit with fixed rates are typically not subject to market fluctuations, this might make them an attractive option if you’re looking for a place to put your money away from potentially more volatile account types.

    Most CDs are protected

    CD accounts are usually insured by either the Federal Deposit Insurance Corporation (FDIC), or the National Credit Union Association (NCUA) as long as the bank or credit union is a member of the FDIC or NCUA. In the event of the insured financial institution’s failure, your deposit would be covered up to the maximum amount allowed by law.

    All in all, certificates of deposit may offer various potential benefits to savers. It might also be worthwhile to explore different types of CD accounts, such as jumbo or liquid CD accounts, in order to find the right fit for your financial goals and cash needs.

    Certificate of deposit disadvantages

    While a CD account might offer several benefits, they’re not without their potential drawbacks. Before committing to a CD account, here are some factors to consider.

    Access to funds

    CD accounts ordinarily have your funds deposited for a set duration, known as a “term.” While you can usually access your money before this term ends, doing so may subject you to early withdrawal penalties or fees.

    Because your funds aren’t as accessible when deposited in a certificate of deposit, you might want to weigh the potential benefits of a CD account against savings accounts. Reviewing different opportunities can help highlight which options align best with your financial goals.

    Fixed interest rate CD accounts

    A fixed interest rate might be an advantage, potentially providing measurable earnings; it could, however, potentially become a disadvantage should interest rates rise during the term of your CD. While you would still net earnings on your deposit, a steep rise in interest rates could mean missing out on higher earnings.

    Is a CD account right for you?

    The answer to this question largely depends on your financial situation, goals and your understanding of CD accounts. Determining whether a certificate of deposit is the right choice for you involves an honest assessment of your goals, risk tolerance, and needs for access to funds.

    For example, those with a short-term savings goal in mind, such as a big trip or a new car, might consider a CD account a suitable way to plan their savings. In this scenario, the fixed earnings of a CD account might prove appealing.

    Alternatively, those seeking a long-term savings account may want to consider long-term certificates of deposit or a CD ladder. A CD ladder allows the customers to benefit from the potential higher earnings of longer-term CD accounts while retaining some flexibility in accessing their funds offered by shorter-term CD accounts.

    Ultimately, by weighing the pros and cons of certificates of deposit and comparing them with other saving options, you can make an informed decision that helps you achieve your financial objectives.

    In summary

    Most certificate of deposit accounts include fixed rate earnings and, if the issuing bank or credit union is a member, FDIC or NCUA insurance, but limits the access to funds. Before deciding whether to open a CD account, it might be worthwhile to review your financial goals and cash needs, and to weigh the pros and cons of certificates of deposit against other options. Additionally, exploring different types of CD accounts can help you find the right fit for your savings goals.

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