What is a CD? (Certificate of Deposit)
A Certificate of Deposit is a savings account with a fixed interest rate and a fixed withdrawal date. In addition, CDs require a specific initial deposit that will be held until the maturity date. Another important feature to understand is that typically the longer the time deposit, the higher the interest yield. CDs are commonly sold by banks, thrift institutions, and credit unions.
It is essential to do your due diligence before investing in something to understand the potential risks and rewards. With that said, there are some great advantages to CDs that could make it a good investment for you.
What Are the Benefits of Investing in CDs?
- There is no risk of losing money – The value of the CD is fixed, and the FDIC ensures the money. Therefore, there is no potential for losing money on this investment.
- The money is out of sight, out of mind – Once a CD is bought, it is locked for the time block chosen. However, you can see this as a positive because of the inability to access and spend money on nonessential items.
- There is a fixed interest yield – A specific interest rate is set once the CD is purchased. Therefore, monthly interest payments are paid out at a fixed percentage. This is beneficial because the returns are unaffected by market volatility or the Federal Reserve altering interest rates.
- CDs are very accessible – You can likely buy a CD from the comfort of your bank or credit union. In addition, transferring funds from one account to the other will be easy and convenient.
What Are the Drawbacks of CDs?
- The returns are not exceptional – The APY (annual percentage yield) in 2021 typically falls in the range of .20%-.85%. In other words, there should be no expectations for these returns to catapult you into great wealth.
- The money is locked away – Having the money locked away in a CD can be problematic if you need the cash in the future. Withdrawing the money prematurely will result in fees and leave you with less than you started. In short, ensure that you will not need the money soon before buying a CD.
What Are Some Examples of CDs?
Ally Bank’s High Yield CD Rates (January 2021)
Up to $5K $5K-$25
3 months 0.20% APY 0.20% APY
6 months 0.25% APY 0.25% APY
9 months 0.30% APY 0.30% APY
12 months 0.60% APY 0.60% APY
18 months 0.60% APY 0.60% APY
3 years 0.65% APY 0.65% APY
5 year 0.85% APY 0.85% APY