If you have found yourself at this blog, then you are almost guaranteed to be asking the question, “ Should I invest in a CD?” Well first, what is a CD, because we’re not talking about a Compact Disc type of CD. A “CD” in the banking world is short for Certificate of Deposit. A Certificate of Deposit is a savings product that earns interest on a lump sum for a fixed period of time. Kind of like a savings account, however you cannot withdraw from this account. Well.. technically you can get your money back out but not without having to pay an oftentimes expensive penalty fees or you can lose interest rates. CDs typically have much higher interest rates than saving accounts as an incentive for lost liquidity. Still not sure if investing in a CD is worth it? Don’t worry about it because True Sky Credit Union has created this blog full of both pros AND cons of investing in a CD, so keep reading.
Pros of Certificates of Deposit
CDs are safe
Unlike stocks and bonds where you can lose money out of nowhere based on the market, CDs don’t risk losing money unless you withdraw from your CD before its “maturity” date. The bonus is that most CDs are Federally Insured up to $250,000.
CDs have Fixed Interest Rates
CD Rates are fixed upon opening them. By locking the CDs interest rates it allows you to know exactly how much money you’ll be earning by the end of your CD term. There is also no risk of interest rates lowering and generally financial establishments offer higher interest rates the longer you set your term. CDs are better than regular saving accounts as banks and credit unions can lower their interest rates at any time.
Provides Structured Saving Goals
As someone who definitely has a spending problem, CDs are a great way to fend off spending temptations, and most CDs provide a variety of terms to structure and plan a saving goal. A CDs term typically ranges from three months to five years, the longer the terms, the higher the interest rates. However, shorter terms provide more frequent opportunities to withdraw and renew another CD.
Guarantees Savings for Near-Future Purchases
Purchases that you plan on buying within five years like a car or down payment on a house are near-future purchases. Money you won’t need until you’re ready and can be kept safely out of reach is perfect for a CD.
Builds Short-term Wealth Before Investments
If you plan on investing your money, short-term CDs that last three months to two years might be the best plan. Some investors use “dollar-cost averaging” which is spreading purchases or stocks or funds over time. While waiting for stocks rates to rise, keeping your money in a short-term CD with high interest rate will help build wealth in the meantime.
Provides Returns Without Risk
CDs work best for those who want to avoid risking their money in the stock market but still want to grow their wealth. Just know that CDs are for short-term safety, not really long term like retirement plans.
Cons of Certificates of Deposit
Now that you have a better understanding about the pros of a CD, the next question at hand is, what are the cons of a CD? True Sky Credit Union has your answer there too. Even with guaranteed returns, a CD might not be the best place to start your savings or investments. For a better understanding, let’s go over the cons of investing in a CD.
Limited Access to the Money Invested
A CD is not a savings account, meaning you cannot withdraw your money whenever you need it. Once you put principal money in a CD, you must leave it there for the fixed time you agreed upon. You cannot add or take the money until the CDs maturity date. If you do open your CD early, there may be penalty fees and you could even risk losing interest rates.
With a locked interest rate, you lose the risk of your interest rate lowering, with the setback of losing the opportunity for growth. If the Bank CD rates begin growing, you are stuck with the interest rate you set when opening your CD. This is where shorter terms might come in handy you can renew your CD with a higher interest rate, but of course, longer terms come with higher interest rates. Even though CDs are safer than using stocks or bonds, most CDs interest rates are lower than stocks and bonds, but you lose the risk of losing money.
Invest in CDs with True Sky Credit Union
So, here we are again at the original question: Should I invest in a Certificate of Deposit? Well, that depends on what your money goals are. Whether you decide to invest in a CD or not, TrueSky Credit Union is here for you. Our CDs are insured for up to $250,000 by NCUA and most of their terms have a minimum deposit of just $500 for 13 months to 5 years. We also offer checking and savings accounts, auto, home, and personal loans, financial help resources, and more. If you’re interested in becoming a member 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. We look forward to assisting you to the best of our abilities.