When you’re trying to save money for long term financial goals, you want to find an investment option that makes the most of the amount you’re putting aside. One of the best, and safe, investment options is a certificate of deposit (CD) account.
These savings accounts allow you to save for a set period of time with a fixed interest rate. You can choose any term length, usually from 3 to 12 months up to 5 years, with varying interest rates available.
Balancing your portfolio with CDs is a great way to make the most of your money. If you’re considering other investment options and want to understand the differences to find the best option for you, we’re here to help.
Certificate of Deposit Explained
As an FDIC-insured investment, certificate of deposit accounts are a special type of savings account that offers a higher interest rate than even many high yield savings accounts. This is because once your money is in a CD, it’s locked away for the amount of time that you’ve set the CD for.
Most CDs range from around 3 to 6 months to 5 years, but some can be as long as 10 years. If needed, you can access the money in a CD but you’ll pay a penalty on the interest that you’ve earned so far.
If you know you won’t need that cash for a while, a CD can be a great way to earn more interest on money you already have. You’ll want to time opening your CD with good interest rates so that you can lock in the best rate possible.
You can buy a CD directly from a bank or local financial institution, with the value not changing throughout the time you hold the CD other than the total interest being paid out at the CD’s maturity date. When you’re thinking about a certificate of deposit vs stocks, this is important to keep in mind. Stocks are much riskier as they’re dependent on bigger markets, but interest rates can also be better if you get lucky with the timing and economic environment.
The Certainty of CDs: Investing with Peace of Mind
Safety and Security
As CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per insured bank, your funds will be much safer than other types of investments. This can give you much more peace of mind as CDs are a good, low risk investment option.
Guaranteed Rate of Return
When you buy a CD, your interest rate is locked in for the term length of your deposit until the maturity date. This guarantees you a predictable rate of return on your investment, which is unaffected by market fluctuations.
Fixed Interest Rates
If interest rates are declining nationally, CDs can be beneficial in ensuring that you’ll still receive a better rate of interest than a traditional savings account. Whatever you locked in at when you opened your CD is what you’ll get when it matures.
Flexible Terms
CDs come with a range of term lengths, from a few months to several years. This means that you can decide what term length is right for you and your financial goals.
Simple and Easy to Understand
CDs have very straightforward terms and conditions, making them an easy-to-understand investment option for those getting started in investing or preferring to make more simplified investment choices.
Higher Interest Rates than Savings Accounts
In general, CDs offer higher interest rates than even many high yield savings accounts. As your money is locked away from a specific amount of time, banks are more confident in that stable cash flow so they can offer a more competitive rate.
No Market Risk
Since the return you’ll be making on your CD is guaranteed, there’s no need to worry about possible market volatility during the term length of your CD.
Laddering Opportunities
Many investors like to use a technique known as laddering. This is where they open CDs of different term lengths so that, as one matures, it can be reinvested at a staggered interval. This provides regular access to the CD funds, while also offering a greater opportunity for reinvestment.
Penalty for Early Withdrawal Encourages Saving
As there’s a penalty for withdrawing funds from a CD before the maturity date, this can be a helpful deterrent from spending your savings! With the money locked away, you won’t be tempted to spend that cash on alternative expenses.
Factors to Consider When Choosing Between CDs and Other Investments
Understanding Investment Horizons
Think about your short vs long term goals. Many CDs are best for short term goals due to their safety, while other investments like stocks and real estate can be better for long term growth—these are more likely to fluctuate in the short term but can potentially yield better results long term.
Investments like CDs are also chosen for their time-bound constraints, whereas long term investments are more open-ended. Think about what you need for your financial goals and what investment option is going to work best for you.
Evaluating Liquidity Needs
CDs have a scheduled liquidity and will pay out a fixed amount based on the investment amount and interest rate. Stocks have more immediate market-based liquidity, but come with higher risks. Real estate sales can be less volatile, but are slower and also subject to market conditions.
The Role of Diversification
One of the best ways to reduce your investment risk is to put your money into a mix of options, from several CDs to stocks and real estate. This makes your portfolio more balanced and likely to see a good return.
CDs offer consistent returns, while stocks and real estate are more subject to market conditions and so are inherently riskier investments to make. A good strategy that many people use is to have CDs as their stable foundation, offering a secure investment return, with stocks and real estate on top of that to maximize potential profits.
The allocation of your CDs is dependent on your individual risk tolerance and the financial objectives you have. Balancing these with more volatile stocks and real estate can be a well-rounded investment approach for many new and experienced investors.
Guaranteed Gains: The Strategic Edge of Certificates of Deposit
At Jefferson Security Bank, we’re here to help you determine the best plan for your budget, savings and investments. Whether you’re looking to invest for the first time, open a new CD, or create a more balanced portfolio, our team will work with you to find a solution that makes the most of your money. Contact us today to get started and open a savings account or certificate of deposit.