Commonly called a CD, a Certificate of Deposit is a savings-based investment that produces a higher return on investment than many others in its class. Considered a sound, reliable investment, CDs are generally part of a well-balanced portfolio. By understanding how they work, as well as their benefits and disadvantages, community members can make informed decisions about adding CDs to their mix of financial holdings.
What is a Certificate of Deposit (CD)?
A certificate of deposit is a type of savings account that offers higher interest returns than products such as passbooks and others. They typically require people to place their money into the CD for a set period of time. Once the end date arrives, the CD has “matured,” meaning the owner receives the full anticipated interest yield.
The maturation of a CD may run anywhere from three months to over five years. Unlike a passbook savings or money market account, the funds in a certificate of deposit are essentially locked. People who wish to make an early withdrawal generally incur penalties. These rank among the popular certificate of deposit options.
- Traditional CD: This product involves fixed terms that range from as short as six months to as long as five years. During the maturation period, traditional CDs offer higher interest rates than passbook.
- Jumbo CD: The primary difference between a Jumbo CD and a traditional option involves a minimum deposit. Although they typically provide preferred interest rates, starting deposit amounts can be considerably higher than traditional CDs.
- High-Yield CD: The interest rates of high-yield CDs are among the best and most competitive. They may not be fully insured, increasing the user’s personal risk.
- No-Penalty CD: Sometimes referred to as a “Liquid CD,” this option allows depositors to withdraw the balance without penalty. It is similar to a savings account in this fashion but also tends to offer lower interest rates than others in its class.
- IRA CD: These are usually positioned within a retirement account with other investments. Often coupled with stocks, bonds, and money market accounts, they tend to comprise the cash element of a diversified portfolio.
- Step-Up & Bump-Up CDs: These CDs are similar because they allow the interest rate to increase during the product's life. The financial institution generally decides when to increase the rate in a step-up CD. In bump-up CDs, the owner makes the call.
- Add-On CD: The key benefit of an add-on CD is that it allows you to contribute more money after the initial deposit. This can be an excellent tool to use in your portfolio strategy in the event your financial goals evolve or your income improves.
It’s also important to remember that a certificate of deposit may be insured up to $250,000 by the National Credit Union Administration. Before investing in a CD, ask a local lending professional whether the organization is adequately insured.
How Does a Certificate of Deposit Work?
Opening a certificate of deposit mirrors that of other types of savings accounts. You can anticipate speaking with a customer care professional and filling out a few forms in person or electronically. The crucial difference between starting a CD and a passbook account is that the initial deposit may be the only one you ever make.During the maturation period, your CD usually grows as compounded interest is added. Ultimately, it can be renewed at a higher rate, or the funds can be withdrawn without penalty. In many cases, CD holders generally shop around before renewing to determine the best available rates.
Pros and Cons of a Certificate of Deposit
When adding a CD to your financial portfolio, take a long look at the maturation terms. Some organizations automatically roll your money into a new CD unless you specify you plan to withdraw. That being said, these rank among the notable pros and cons.
Pros of a Certificate of Deposit
In many ways, CDs are something of a middle ground between taking risks on the stock market and safe, low-interest savings accounts. These are other reasons to invest in a CD.
- Return on investment is gradual, reliable, and easy to estimate.
- A certificate of deposit delivers competitive APY.
- The interest rates of CDs are usually greater than money market accounts.
Cons of a Certificate of Deposit
Each lending, savings, or investment product is designed to serve a specific purpose. That generally means they aren’t suitable for every financial goal. These are among the disadvantages of investing in a CD.
- Early withdrawal penalties can wipe out gains.
- Inflation may outpace the growth benefits of CDs.
- A certificate of deposit doesn’t provide the flexibility of other savings-based options.
- Factors to Consider Before Investing in a certificate of deposit
Investing in a certificate of deposit can be an excellent tool for diversifying your financial portfolio. Considered a low-risk option that provides a robust return on investment, community members can employ it strategically to achieve short- and long-term goals.
For example, taking out a CD and planning its maturation date when a child graduates from high school can position your finances to pay tuition. The same holds true of retirement planning and quality of life expenditures. When investing in a CD, weigh the time, interest rate, and whether you can afford to set money aside and not touch it until the maturity date.
When is a Certificate of Deposit a Good Choice?
Safety is one of the primary reasons community members add CDs to their investment opportunities. The stock market tends to be unpredictable, and we’ve all seen periodic crashes. That’s why a certificate of deposit is a good choice if you don’t feel comfortable taking risks. CDs may be suitable for you if you like a steady, secure, reliable return on your investment.
When Might a Certificate of Deposit Not Be the Best Option?
There are a wide variety of reasons why CDs are not necessarily a seamless fit for financial goals. They require you to keep all the money in the product until it fully matures. Straying from those rules usually results in penalties. Another reason investors take a pass on CDs involves the rate of return. People who are okay with taking risks prefer to gamble on the stock market, real estate, and other potentially more lucrative opportunities.
Are CDs Safe?
The short answer is: Yes. From an investment standpoint, CDs deliver a reliable profit within a time frame of your choosing. The gains are calculable, and even if you decide to pull out of CDs and go in another direction, the penalties don’t usually cut into the initial deposit. And, of course, the National Credit Union Administration insures depositors up to a quarter-million dollars in the event of a significant setback. Those are reasons why risk-averse community members like investing a portion of their resources into a certificate of deposit program.
Tips for Maximizing the Benefits of a Certificate of Deposit
A variety of strategies exist that help working families maximize the benefit of their certificate of deposit investments. Some of the best approaches split resources into multiple CDs and reinvest at pre-determined dates. These are ways to increase your personal wealth by leveraging CDs.
Climb the CD Ladder
This portfolio strategy involves breaking your investment into multiple CDs with different maturation dates. As each matures, you can decide whether to reinvest the funds into a long- or short-term option based on prevailing rates.
Lift the CD Barbell
This strategy involves splitting your investment into two equal parts. Place one in a short-term CD program and the other in a long-term option. As the first comes to term, look at the rate landscape and decide to re-invest in another short-term CD or one with a lengthier period.
Hit the CD Target
A CD target strategy also breaks up the investment into multiple products. But it also staggers the maturation dates to allow the investor to renew with a long-term date in mind. The ultimate goal is to make the most of evolving interest rates and have the entire investment mature at once.
At Carolina Trust Federal Credit Union we are here for you and help you advise on your money needs. Get in touch with us and check out are amazing rates on or Certificates here.
