On one hand, certificates of deposit have benefits that make opening one absolutely worth it. They offer an exponentially higher interest rate than a traditional savings account, and that rate will stay the same until the CD matures. This makes a CD one of the most reliable ways you can invest your money.
On the other hand, CDs have drawbacks that make people think they’re not worth it. The biggest drawback? You won’t be able to access your money until the CD matures, at least not without paying a penalty.
The real question, though, isn’t whether CDs are uniformly good or bad investments. Instead, you should be asking:
When you have some extra money lying in your savings account that you’re not going to miss, you could do worse than putting it into a CD. If you’ve gotten a windfall, for instance, and you’re not sure how to put that money to good use, you can open a short term CD account and let it earn a higher rate of interest while you decide what to do with it.
Of course, a CD isn't the only way to invest a large sum of money. You could also put money in the stock market or a mutual fund, and to be fair both of those options can potentially give you a higher rate of return. When you put your money in a CD, though, you're getting something that a mutual fund and stock market won't give you--stability.
While individual stocks and mutual funds might give you more money than CD yields, they also have a higher risk. You could lose part of the money you invested, even if the stock or mutual fund has a long track record of being profitable. A certificate of deposit, though, gives you a fixed interest rate you can count on for the set period of the CD. It won't go up or down, and once the CD matures you can either put the money in a regular savings account, a checking account or even open up another CD if you're not sure what to do.
In theory, there's no maximum amount you can put into a certificate of deposit. However, you should be aware that any amount over $250,000 won't be insured by the National Credit Union Association (NCUA) or the Federal Deposit Insurance Corporation (FDIC), so you should avoid putting any more than that in a CD.
If you’re saving money for a financial goal, you ideally won’t be using the funds you’ve saved until you have enough to achieve your goal. So why not put your money in a CD until you have the money you need?
When you use a CD to store the money you’re saving for a financial goal, you get several advantages. The most obvious advantage is that the higher interest rate will give you more money to put toward your goal. However, you also won’t have to worry about being tempted to use your goal money for other things until the CD term is done. Thanks to the fixed interest rate of a CD, you'll also be able to calculate how much money will be deposited into your bank account, which can be a big help when you're trying to figure out when you'll reach your financial goals.
You can even use some CD strategies to maximize the return on your investment, such as:
By this point, most people know the importance of putting aside money for an emergency fund, and that their goal should be to have six months of salary in their account. Once you achieve that goal, though, what do you do with the thousands of dollars just sitting in your savings account?
One of the best solutions is to put part of your emergency fund money into a CD while still having $2,000 -- $3,000 in your savings account to take care of most financial emergencies. You’ll get the benefit of the higher interest rate, so when you do have to dip into your emergency fund you be able to build it back up faster. You can also use the CD ladder strategy to stagger maturity dates, which will maximize the interest you’ll get while making sure you’ll be able to access the cash in your emergency fund if a serious emergency arises.
A CD ladder is an investing strategy where you open multiple certificates of deposit, all with different terms. When the first CD matures, you use the money you receive to open a new CD with a longer term as the next "rung" in the ladder. This can be a better option than simply opening one CD, since you'll be able to get a higher rate of return while still having access to your money at regular intervals.
A CD account has several advantages and disadvantages, so you’ll need to know when opening one is worth it. One good way to take advantage of certificates of deposit is to put extra money in one, such as the money you'd get from a windfall.
You should also consider opening a CD to store the cash you're saving for a financial goal, since the fixed rate of interest will help you figure out when you'll be able to reach your goal. It's also good choice if you want to invest part of your emergency fund, since a CD has a higher return than a traditional savings account.
If you’d like to see what a CD can do for you, become a member of First Alliance Credit Union today. A member advisor will be happy to help you open a CD account. You can also use Direct Deposit to put money into our traditional savings accounts until you have the minimum deposit requirement for a CD, and once you’ve opened the CD you can track its growth with our online banking platform and mobile app.
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Chris Gottschalk