Certificate of deposit (CD) accounts are among the many ways banks help customers to save and grow their money. A CD account is a deposit account allowing you to deposit money and earn a fixed interest rate on it over a set maturity period.
Though CD accounts have been around for quite a while, consumers may have some misconceptions about them. However, CDs can potentially play a helpful role in your overall savings strategy. With that in mind, let’s review a few common misconceptions.
Misconception: CD accounts are only for the wealthy
You need a large deposit to open a CD account, right? That isn’t always true. Depending on the bank, you may be able to open a CD account with a minimum deposit of just a few hundred dollars. While a larger deposit is likely to see greater overall growth due to the way interest accrues over time, you’ll still see growth on your deposit if it’s on the smaller side.
Misconception: CD accounts are risky
The idea that CD accounts are risky may be one of the biggest misconceptions. A CD account may be one of the safest vehicles for your money. That’s because they’re backed by FDIC or NCUA insurance (depending on your financial institution) up to $250,000. You’re likely to get your deposit back plus any accrued interest (up to the aforementioned amount) if the bank becomes bankrupt.
Misconception: CD accounts tie up money for too long
A CD account typically requires the opening deposit to be held for the entire maturity period (or you may incur an early withdrawal penalty). That term could range from as short as one month to as long as a decade. It's certainly possible to keep your money in a CD account for several years at a time, but there are plenty of shorter-term lengths to choose from as well.
Misconception: CD accounts will not show a large rate of return
It’s true that CD earnings aren’t as splashy as hitting a once-in-a-lifetime return on a stock purchase. While those returns might be exciting, CD accounts offer the tried-and-true approach of “slow and steady wins the race.” An advantage of CDs is the security of knowing that, regardless of what happens in the market, your CD will earn interest at a fixed rate and pay out on time.
Misconception: There's only one type of CD account
As previously mentioned, CD accounts offer multiple options for term lengths. However, that’s not the only way CD accounts offer customers options to suit their needs. Some financial institutions offer CDs with fixed or variable rates and may waive withdrawal penalties. Be sure to check with your financial institution for specific details.
Misconception: Savings accounts are better than CD accounts
If you’re concerned about being able to withdraw your money when you want, a savings account may be better for you. But if you’re looking for a “set it and forget it” approach to saving and growing your money, a CD account may be the better option.
The “best” choice for you really depends on your personal needs, because each account works in different ways. It’s a bit like spending time comparing apples to oranges when it’s possible to make a fruit salad and get the best of both. Be sure to explore the differences between savings accounts and CD accounts to learn which may work better for you.
As you can see, when it comes to CD accounts, they're not as scary as they might have seemed. A CD account can be a safe way to grow your money over time. In times of volatility, CDs may offer stability and reliability.