A great tool for earning interest on your money is a Certificate of Deposit (CD). A CD is essentially an agreement between you and your credit union or bank where you promise to not withdraw any cash within a specific period of time, and in return the credit union or bank pays you a higher rate of interest on the money used to fund the CD.
The period in which you are not allowed to withdraw any cash varies depending on the terms of the CD. The terms can be as short as three months for shorter term goals, all the way up to five years for longer term investing goals. Generally speaking, the longer the terms of a CD, the higher the interest rate you'll get.
Though Certificate of Deposits are considered to be a solid tool for investing, they also have their own strengths and weaknesses that should be considered. The following is a list of the advantages and disadvantages of a Certificate of Deposit to consider:
Flexible Terms: The terms and the amounts that can be deposited into a CD are flexible. If you are not willing to tie up your money for a long time, you can easily opt for a shorter term. At the end of a CD term, you can renew that CD or start a new one.
Limited Liquidity: The owner of a CD cannot access their money as easily as a traditional savings account. To withdrawal money from a CD before the end of the term requires that a penalty has to be paid. This penalty can be in the form of lost interest or a principal penalty. To increase flexibility, the investor can create a CD Ladder, which is composed of CDs with different maturity dates and terms. With a laddering strategy, you have more options to access your CD savings at different intervals of time. With these advantages and disadvantages in mind, it is wise to consider that CD advantages usually outweigh the disadvantages. CDs allow you to grow your savings without hassle. You can easily compare different types of CDs with the help of online resources, and you can find one that best suits your needs.
Certificates of Deposit (CD) are useful for people looking for a way to save money while earning a relatively high interest. They not only help you save money, but they also let your money earn more interest with no additional effort on your part.
If you'd like to put your money into a certificate of deposit, become a member of Fist Alliance Credit Union today and talk with one of our member experience advisors. They'll help you figure out the type of CD that best fits your financial needs.
Want more information about certificates of deposit? Listen to episode 30 of our Good Money Moves podcast, which covers certificates of deposit in depth!
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