4 benefits of a certificate of deposit (CD)

Are you on the hunt for a secure way to grow your money? Although it may not be on your radar, consider the benefits of a certificate of deposit (CD). In a nutshell, a CD is a deposit account that runs over a fixed period of time, typically anywhere from three months to 10 years. Designed as a safe and secure way to increase your rate of return, one of the benefits of a CD is that it grows your money regardless of what the market does. The interest earned on a CD is dependable, and it grows thanks to the power of compound interest. Plus, your interest payment on a CD at maturity will often be higher than that earned in most savings accounts.

If you understand how CDs work but want to learn how they can help you increase your savings, here are four benefits of a CD:

1. CDs can be a safe choice

One key benefit of a CD is that it’s typically a safe way to increase your savings rate of return. If you’re skittish about the stock market or tying up money in bonds, you might appreciate the security of a certificate of deposit. The FDIC insures CDs up to the maximum amount regulated by law. Before you open a certificate of deposit, confirm that your financial institution is FDIC insured so if it were to fail, you would know your money is protected.

While having the FDIC on your side helps, CDs also come with further protections. One of the main benefits of a CD is that unlike stocks, where it’s possible to gain or lose large sums all in one day of trading, the interest earned on a CD will allow your money to consistently grow.

Andrew Denney, founder and CEO of a financial planning firm, says that a CD can be secure because in some cases, you can “cash out and still get the principal.” However, you should note that while your initial deposit can be safe, you may face an early withdrawal penalty that could eat into your interest payment if you cash out early. At times, these penalties could also impact your principal. (Skip to CD benefit #4 to learn more.)

2. CDs can have fixed rates for fixed terms

Financial markets can be volatile and returns for investments in the stock market or real estate, for example, can be unpredictable. Some years are fruitful, and others are… less so. But another benefit of a CD is that you can lock in a fixed interest rate for a set period of time. Unlike the sometimes roller coaster fluctuations of the markets, a CD grows dependably thanks to slow and steady interest.

When you weigh the benefits of a certificate of deposit, there are three interest rate options to consider:

• A fixed-rate CD has a set interest rate that is paid throughout the life of the CD. A 5-year CD with a 2.00% APY (annual percentage yield) will earn that rate for the entire term, regardless of any interest rate increases or decreases during the time you have the CD.
• A variable-rate CD typically pays a percentage according to the difference between the interest rates at the beginning and end of your CD’s term. For example, if you opened a 2-year variable-rate CD at 1.05% APY and it grew to 1.15% APY, your rate of return would be calculated based on the increase over that time period.
• An adjustable-rate CD has a set interest rate at the time of your deposit but comes with the option to “adjust” the rate during the CD’s term. (Note that you may only be able to adjust the rate a limited number of times.)

Alexander Joyce, president and CEO of a retirement planning firm, says that although they are less liquid, an important CD benefit is the fixed interest. If you opt for a longer-term CD, such as one with a three-to-five-year term, the interest rate could be higher, Joyce adds. Depending on the financial institution where you open your account, and how long you want to keep your money in a CD, it is possible to find rates of return advantageous for both short and long terms.

3. CDs come with different maturity dates

Are you hoping to purchase a car in the next few years, or are you saving for something further out on the horizon like your toddler’s future college education? Among the many CD benefits are their different maturity rates. CDs allow you to safely park your funds for a set period of time in a way that aligns with your financial goals.

Randy Becker, owner of a retirement planning group, says a benefit of a CD is that it can help you save for large, one-time expenses over a fixed period of time. If, for example, you plan to take an expensive vacation in the future, you can put your funds in a CD that matures right before you leave for your trip. “You can match your CD to the timing of life events,” Becker says.

4. CDs may have low or no fees

Another benefit of a certificate of deposit is that it may have a low-to-no fee structure. Some banks don’t charge a monthly fee to hold your money in a CD. This comes in handy, according to Joyce, because you don’t have to worry about fees impacting the interest earned on your CD.

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While the absence of a monthly fee is a key CD benefit, it’s important to remember that there could be other costs associated with a certificate of deposit. One example is the early withdrawal penalty. Should you take your money out of the account before its maturity date, the bank may impose a penalty, which could negatively impact your interest payment or even your principal.

An early withdrawal penalty and account fees depend on the agreement at the time you open the account, so make sure you read the fine print and have a clear picture of how to avoid bank fees (if any apply). Some banks offer no-penalty CDs, so it might be useful to inquire about these, too.

Making wise financial decisions

There are many benefits of a CD, including safety, low-to-no fees, and, in some cases, flexible maturity dates. These CD benefits can provide invaluable peace of mind when it comes to your money. And, Joyce says, sometimes the potential gains in an uncertain market don’t outweigh the need for a financial product like a CD that provides reliable growth.

“Feel secure about that,” he says.

Feeling confident about your CD knowledge? Then now’s the time to step up your savings game with a CD ladder.

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