A Certificate of Deposit, or CD, is a safe investment option for people of any age who want a low-risk way to invest their hard-earned savings. Certificate of Deposit is similar to a savings account in that it is insured by the FDIC (Federal Deposit Insurance Corporation), but the key difference is, CDs have a fixed term and a fixed interest rate. If you choose to withdraw your money before the maturity period set by the financial institution, you will have to pay the penalty. Unless you are in some emergency, such a restriction on withdrawals may even help fend off spending temptations.
Many financial institutions, traditional banks as well as newer online financial firms, offer Certificate of Deposit schemes. You may even check with your local credit union to see if they provide CDs. For example, Marcus by Goldman Sachs offers a Certificate of Deposit with an APY (Annual Percentage Yield) of 2.15%, a one year term period with a minimum deposit amount of $500. This means, after one year, your $500 becomes $538. Various banks offer multi-year CD schemes, typically ranging from 1 year up to 5 years and with different minimum investment amounts. You can shop around online to find the best CD scheme that works for you.
Are there any disadvantages to CDs? The number one downside is that a CD locks your money in for a set period, which may make it a hard investment choice if you are someone who is often in need of money in case of any emergency. Also, if you withdraw the invested amount before the interest rate has taken effect, the penalty levied by the bank could result in a reduced principal.
So what are the real benefits of opening a Certificate of Deposit?
The most significant benefit is a higher rate of return on your investment as supposed what you earn, keeping your money idle in regular savings or checking account.
Unlike investing in stock markets, which are high risk but can earn you higher returns (if you pick the right stocks), Certificate of Deposits are low-risk investments and remain unaffected by market sentiments.
One can be flexible and invest in a CD for a year and then switch to a longer or shorter period if they wish to continue to grow their money. You need not anticipate what your gains would be; what you signed up for when opening a CD is what you will get at the end of the agreed term period. CDs ensure a guaranteed growth in value, and there no risk in fluctuating rates during the term period. Add to that, unlike investing in equity-related products, the FDIC-backed insurance protects your CD if the financial institution you opened the CD with were to fail. Such benefits make Certificate of Deposit a safe investment choice for a depositor seeking to park his or her money for a particular time.
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