Pros and Cons of CD Accounts
A certificate of deposit (CD) account can be a great tool to invest money with low risk. A CD is an agreement between a financial institution and an individual who offers to invest their money for a given period of time. The CD account incurs monthly interest that will be made available to the investor after the allotted time agreement. In order to avoid fees, you must keep funds within the account until the end of the term. CDs typically have higher interest rates than saving accounts as an incentive for lost liquidity. Are you still not sure if investing in a CD is worth it? Don’t worry, this blog breaks down the advantages and disadvantages of certificates of deposit, so keep reading to the end!
Advantages of Certificates of Deposit
Below are some of the advantages of certificates of deposit, we used True Sky Credit Union’s CDs as an example to list the advantages.
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CDs are Safe and Insured
CDs can be an oasis for money savers who want to set aside a set amount of funds with relatively zero risk. Even in the unlikely scenario that your bank fails to fulfill its agreement, your CD savings are protected by the FDIC.
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Fixed Rates
CD rates are fixed upon creating the account. By locking the CDs interest rate, it allows you to know exactly how much money you’ll be earning by the end of the term. Fixed rates can be looked at as a Pro and Con but in a world of uncertainty knowing your return is attractive for many investors. CDs are better than the average saving account because banks can lower their interest rates at any given moment.
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Guaranteed Returns
Certificates of deposit pay a guaranteed rate of return for a set period of time. CDs come with a wide range of terms and interest rates, but you can consider CDs to be one of the safest places to save and invest your money. Returns are guaranteed on CD accounts as each account is federally insured for up to $250,000.
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Helps you manage your money with no maintenance fees
Keeping money in a CD account is something you should consider as part of your overall financial plan. CD accounts can align your short and long-term goals by providing you with clarity on how much money you’ll receive on a given date. Whether it’s savings for a trip or buying that new car, CD accounts keep money far enough away to keep you disciplined and give you something to look forward to. Also, savings accounts can be charged a monthly maintenance fee, which is not the case with Certificates of Deposits.
Disadvantages of Certificates of Deposit
The advantages of CDs are extensive but it begs the question, what are the disadvantages of Certificates of Deposit? After all, each individual is on their own unique financial journey. Even with guaranteed returns, a CD account may not be the best place for you to invest your money for short or long-term goals.
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Accessibility and Early Withdrawal Penalty
Under the terms and conditions of CD accounts an investor can’t access their funds until the end of the agreed term. CDs are locked in until the maturity time frame and early withdrawal will cause a percentage penalty to go into effect. CDs are less liquid than a savings account and early withdrawal can trigger penalties that can cause you to lose interest gained. You could be charged up to three months’ interest for an early withdrawal from a CD that is set for six months or less. If you have a five-year CD account, the early withdrawal penalty could be up to a year’s worth of interest or more.
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Rates V.S Inflation
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Inflation is a steady increase in consumer prices, and CDs fixed rates can have difficulty keeping pace. So, at the end of the maturity term, your investment could have less purchasing power. This is why a CDs fixed rate is a double edged sword when deciding to invest in an account.
Certificates of Deposit at True Sky Credit Union
Here at TrueSky Credit Union, we’re local, and we care about what you think. Some financial institutes may call you a customer, but here at True Sky Credit Union, you’re more than that. You’re a member, a part of our credit union family! If your financial goals align with investing in a CD account, True Sky Credit Union is here for you. Also, True Sky offers checking and savings accounts, auto, home, and personal loans. If you’re interested in becoming a member of our credit union or just want to learn more about us, feel free to explore our website, give us a call, or stop by one of our many locations throughout the Oklahoma area.
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