Why Do You Need an Emergency Fund?
- Job loss or unemployment
- Medical or dental bills
- Home repairs
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, it is a deposit account with a set term, typically running anywhere from three months to 10 years. But more than that, a CD is designed to increase your savings because regardless of what the market does, money you put into a certificate of deposit grows thanks to its superpower: interest.
If a certificate of deposit sounds like something that could do wonders for your financial plan, you’ve come to the right place. Here are four benefits of a CD:
Are you skittish about betting on the stock market or tying up your money in more volatile products such as bonds? A benefit of a certificate of deposit is that it can lay many of those fears to rest. That’s because the FDIC insures CDs up to the maximum allowed by law. Before you open a certificate of deposit, confirm that your financial institution is FDIC insured so if it were to fail, you know your money is protected.
While having the FDIC on your side helps, CDs 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, money put into a CD will continue to grow predictably.
Andrew Denney, founder and CEO of financial planning firm Prosperity Financial Group, says that a CD can be secure because in some cases, you can “cash out and still get the principal.” However, while your initial deposit can be safe, if you cash out early, you may face an early withdrawal penalty that could eat into your interest. At times, these penalties could also impact your principal. (Skip to CD benefit #4 to learn more.)
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 the life of the product. Unlike the sometimes roller coaster fluctuations of the markets, a CD grows dependably courtesy of slow, steady interest.
When you weigh the benefits of a certificate of deposit, there are three interest rate options to consider:
Alexander Joyce, president and CEO of ReJoyce Financial, LLC, a retirement income 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 3-to-5-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 advantageous for both short and long terms.
A CD is designed to increase your savings because regardless of what the market does, money you put into a certificate of deposit grows thanks to its superpower: interest.
Have you dreamed about soon taking the trip of a lifetime, or are you saving for something further out, like higher education for a child just learning the multiplication tables? Among the key CD benefits is that it can provide a safe place to park your funds for a set period that’s aligned with your financial goals.
Randy Becker, a retirement planning professional and owner of Becker Retirement Group, says a benefit of a CD is that it can help you save for large, one-time expenses. If, for example, you plan to take a costly vacation in the future, you can put your funds in a CD that matures right before you leave. “You can match your CD to the timing of life events,” Becker says.
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 your CD earnings.
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While the absence of a monthly fee is a key CD benefit, it’s important to remember that some other CD fees do exist. One example is the early withdrawal penalty (remember this?). Should you take your money out of the account before its maturity date, the bank may impose a fee, or penalty, which could negatively impact your interest or principal.
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 what fees and penalties, if any, apply. Some banks offer no-penalty CDs, so it might be useful to inquire about these, too.
While CDs currently offer a leaner interest rate compared to robust rates of cycles past, don’t be discouraged. The benefits of a certificate of deposit are many, 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.
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1 Study by T. Rowe Price Retirement Plan Services.