Investing in a Certificate of Deposit (CD) can be a great way to diversify your portfolio and earn a guaranteed return on your money. With a CD, you'll be able to access your funds in the future without any penalties or fees. From providing a steady return on your investment to giving you higher interest rates, CDs have a variety of benefits that make them an attractive option for many investors.
USA Today analyzed 140 certificates of deposits (CDs) offered by more than 80 financial institutions, both big and small and in between, to determine the best savings options. Data supports that CDs are a higher return, low-risk investment backed by the Federal Deposit Insurance Corporation (FDIC) that offers competitive interest rates and the security of knowing that your funds are safe. Keep reading to learn more about the advantages of investing in a CD.
Fixed Interest Rate
A CD is a type of financial instrument that offers a fixed rate of interest on a deposit of money. This type of investment is ideal for investors who prefer a secure, low-risk investment with a guaranteed rate of return. The main benefit of investing in a CD is the fixed interest rate that's guaranteed for a specific period of time. This allows investors to plan their finances with greater certainty, as they know exactly how much money they'll earn on their investment. The fixed interest rate also means that investors are not at risk of losing money due to market fluctuations, as the rate remains fixed throughout the life of the CD.
Ladder Options
A CD ladder is an investing strategy in which customers invest in CDs of increasing lengths—one year, two years, etc. This lets investors tap into their money along the way while keeping some of it invested for a longer period. The ladder strategy involves investing in multiple CDs at different maturities, creating a ladder-like structure. This allows investors to access their funds at regular intervals while still earning a higher yield than they would with a single CD. For example, an investor might invest in CDs for terms of three, six, and nine years. This allows them to make withdrawals every three years while also earning a higher rate of return than they would with a single CD.
Guaranteed Returns
Investing in certificates of deposit is a great way to save money and make a steady return on your investment. CDs are a type of investment that offers a guaranteed rate of return over a set period of time. The longer you invest, the higher the rate of return. CD accounts offer predictability in that they're relatively easy to determine how much interest you’ll earn over time since rates are typically fixed for the entire term.
For example, say you open a five-year CD with $5,000 and earn a 1.00 percent annual percentage yield (APY). At the end of your CD term, you’d have $5,255 and change. If you’re saving for a long-term goal that has a specific end date, you can tailor your choice of CD terms and interest rates to help you meet your goal.
Higher Rates
Another benefit of investing in a CD is that it offers a higher rate of return than traditional savings accounts. This rate is typically higher than the going rate of interest in the market and is generally used to incentivize customers to make long-term investments. This allows investors to earn more interest on their investments.
For a long-term investor, CDs can be especially beneficial with higher rates. When it comes to investing, higher rates of return mean more money in your pocket. Higher rates of return are achieved by investing in longer-term CDs. A longer-term CD will have a higher interest rate than a short-term CD, so an investor can maximize their returns by investing in longer-term CDs.
Security
One of the primary benefits of investing in a CD is the security it offers. CDs are federally insured, meaning that the FDIC will reimburse depositors up to a certain amount should the bank fail. The current coverage limit is $250,000 per depositor for each account ownership category per financial institution. At federal credit unions and the majority of state-chartered credit unions, the National Credit Union Administration (NCUA) insures money up to the same limits.
Overall, investing in a CD can yield significant benefits. By taking advantage of the higher interest rates and FDIC protection, investors can grow their savings and protect their funds from market volatility. In addition, CDs can provide investors with a way to diversify their portfolios and take advantage of longer-term fixed rates.
