There are various types of assets available to you as an investor. Keeping your money in a savings account is generally considered to be a safe option to protect your principal, however the interest you gain from a savings account is minimal. On the other hand, putting your hard-earned money in growth-oriented assets such as stocks may offer greater potential for gains, but it comes with significantly more risk. Putting your money into a Certificate of Deposit (CD) can maintain a high level of safety while also providing you more interest than a savings account.
What is a CD account?
When you deposit money into a CD account you will earn interest on the lump sum of funds deposited over a specified length of time. However, the funds withdrawn before maturity may trigger an early withdrawal penalty. This rule is in place for the entire fixed period of time of the CD. One advantage of a CD over a savings account is that CDs generally pay out at high interest rates in exchange for you giving up liquidity.
Interest rates
Many investors prefer CDs because the interest rates paid are fixed.. This provides investors with more consistency and predictability compared to volatile assets such as stocks.. However, this can be a disadvantage if rates rise which would mean you would lose out on the opportunity to earn more money in other interest-earning investments.
Term length
The term of the CD will end at the fixed maturity date. Generally, the longer the term the higher interest rate payments financial firms will offer. Common term lengths offered are six months, one year, 18 months, two years, and five years. Upon reaching maturity you will be able to withdraw your funds without incurring a penalty charge.
Principal
The principal is the lump sum amount that you have agreed to deposit into the CD account. You will earn interest rates based on this principal amount deposited.
Choosing a financial institution
There are many banks and credit unions offering CDs with varying terms that provide different advantages and disadvantages. It is a good idea to shop around thoroughly and compare and contrast the different aspects of terms offered, such as fees charged for early withdrawals. You can also look at the interest rates offered by each financial institution.
Should you invest with a CD?
Every investor is different and will have their own needs and financial objectives which will determine whether or not investing in a CD is the right move. You should take a look at your current financial situation and perform a thorough financial analysis. This will enable you to determine if a CD is right for your investment portfolio. Speaking with a knowledgeable professional financial advisor can help you decide what is the best decision for you.