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A certificate of deposit, or CD account, is a financial product sold in the U.S. by banks and financial institutions. CD’s are similar to a regular savings account in that they are both FDIC insured, making them very low-risk.
However, the biggest difference between the two is that a CD is a one time deposit and you cannot access your money until the CD matures, unlike a savings account. In exchange for the locked funds, you receive a higher yield rate that is locked in at the time you open a CD.
Since both accounts are very low-risk, it can be tempting to just opt for opening a CD with a high yield rate, but like any security, it is important to consider the benefits and the risks.
Before deciding if a CD account is the right investment choice for you, here are some of the pros and cons of investing in CDs.
Like savings accounts, CD accounts are FDIC insured up to $250,000 which is a great safety for CD investors. According to the FDIC, since it was established in 1933 no investor has lost a penny of FDIC-insured funds, making CD investing virtually risk-free and a great way to easily grow your money.
Better returns than savings deposits
Money placed in CD accounts are locked up for a certain amount of time depending on the maturity, which is why banks pay investors a higher yield in return. Placing your cash in a high yield CD account can grow your money much faster than if placed in a low interest savings account.
Locked interest rates
CD investors can rely on the fixed interest rate on their account. Even if the interest rates fall, your interest rate will still be the same and you can rely on a fixed return on your account.
There are tons of options for CDs, which can offer different maturities and yields. This wide range of options means that investors can carefully choose the CDs that best fit their specific needs.
Locked funds and early withdrawal penalties
The biggest con of opening a CD account is that you can’t access your money until the CD matures. If you need to withdraw money before the CD matures, you’ll often have to pay penalty fees, which may not be a good investment choice if there is an emergency. Placing too much of your money into a single CD could turn out to be a costly mistake.
Although CD yields are more appealing than regular savings accounts, returns are lower compared to investing in something slightly riskier for the long term, such as stocks or bonds.
Since CDs have fixed interest rates, locking in a high APY at the beginning means that you won’t have to worry about rates dropping. However, you may risk opportunities for higher returns if CD rates start rising after you’ve already invested in a CD.
CD interest rates can lag behind inflation rates. Since your money is locked in, inflation may end up growing faster than your money, which lowers your real returns. In this case, keeping your cash in a savings account with more flexibility and a high interest rate may be a smarter choice.
If a CD account still seems like the right choice for you, here are the best CD rates as of December 2018. You can also check Bankrate at any time for a comprehensive overview of the top CD rates and can help you narrow down your options that best fit your investing needs.