With the current high-interest rate environment, there are new opportunities for you, as a bank customer, to explore growing your money. One of those opportunities is leveraging Certificate of Deposits (CDs). In this blog, we will outline the primary aspects to consider when deciding whether or not to take out a CD, discuss the primary advantages of CDs in the current market, and touch on alternatives if you find CDs aren’t right for you.
What is a CD?
A CD is a time-deposit financial product offered by banks and other financial institutions. When you invest in a CD, you agree to deposit a specific amount of money for a fixed period, typically ranging from several months to a couple of years. The bank will then pay you interest on your deposit at a rate determined when you deposit the money. While during this time period, you cannot access your deposit, you will often earn significantly more interest than a traditional savings account and this rate will remain fixed for the entire term of the CD. Once the term ends, you will receive the initial deposit you made when you took out the CD along with the accrued interest.
Advantages of a CD
These special characteristics can give pretty substantial advantages to financially smart bank customers. These advantages include:
- Competitive interest rates: in a high interest-rate environment, CDs will offer much higher interest rates than traditional savings accounts, helping you to earn more on your savings over the term of the CD.
- Guaranteed returns: it’s difficult to know with traditional investments in stocks and bonds what your return will be in advance. While there are very secure investments you can make in the stock market, the investment return on a CD is guaranteed and predictable at the time you make the deposit
- Highly secured: CDs are considered very low risk investments not only because their return is guaranteed but also because they are insured by the FDIC by up to $250,000 per depositor, just like a standard savings account. This makes them a very safe choice for conservative investors or those looking to diversify their portfolio
- Wide range of terms: CDs come with a host of options for term length, allowing you to choose the most suitable option based on your financial goals. If you know you’re saving for a down-payment on a house and you’re looking to buy a home in 3 years, you can go with a longer-term length. If you’re looking to purchase a new car in a shorter time frame, say three months to a half-year, you can choose a much shorter term for your CD
What to consider before taking out a CD
It’s clear to see that there are a host of benefits when you are considering investing in a CD; however, like any investment, there are important aspects of CDs to consider before you make your decision.
The term length
Understanding and selecting the right term length is probably the most critical factor when selecting a CD. Longer terms generally will give you higher interest rates, but your funds will be locked-in for an extended period of time. If you do not plan your budget well and need to withdraw your CD prior to the end of the term, you could be subject to early withdraw penalties that would result in loss in interest earnings or, sometimes, even a portion of your initial deposit.
The rate
The second most important consideration is the rate of the CD. Many financial institutions will offer promotional CD rates to attract customers or increased deposits, meaning there are often advantages to shopping around for the best rate and term for your financial situation. Alternatively, having CDs, savings, and checking accounts across multiple financial institutions can be an administrative burden. When comparing rates for CDs, also think of the value that consolidating your financial footprint to just one or two banks can add to your peace of mind.
The renewal policy
The third and final most important aspect to consider around CDs is whether or not they have automatic renewal. Some CDs will automatically renew at the end of the term and roll over into a new term with a similar duration. If you want to access your funds at maturity or re-invest in a different product, make sure you’re aware of the renewal policy and communicate your preferences to your banker.
While, especially in today’s high-interest rate environment, CDs can be a very compelling investment option, it’s always important to consult your banker on the pros and cons based on your current financial situation. If you would like to learn more about CDs, visit a branch today, where we have financial professionals who can help you understand whether or not CDs are right for you and which CD product will best fit your financial situation.
