The Value of Certificates of Deposit (CDs)


Finding the right investment tool to get the most from your savings can be a head-scratcher. There are so many options available, from savings accounts to stock investments. Most savers want to find the right investment tool that provides maximum yield with minimum risk, which is why more savers are purchasing certificates of deposit (CDs), also known as share certificates at credit unions.

What is a CD? A certificate of deposit is a way of putting aside a chunk of money, as low as $1,000, in savings for a specific period of time, and not redeeming that certificate of deposit until it matures. In essence, you make an agreement with the bank that they can have your money for the length of the CD, and in return, they offer a higher return on your money. The investment length varies from a few months for short-term CDs to four to five years for long-term CDs. The longer the investment period, the higher the yield. However, all certificates of deposit carry penalties for early withdrawal. The objective is to get a guaranteed return for a committed investment.

When considering various investment options, most consumers ask themselves, “What is the real value of certificates of deposit? Aren’t there better ways to save?” Depending on your financial requirements, there are other savings vehicles that might be more attractive. If you put your money away in a savings or money market account (MMA), you have ready access to your cash when you need it. However, savings accounts and money market accounts have lower interest rates which mean lower returns. If you are a risk-taker, you can consider investing in stocks, mutual funds, or equity funds, but your chances of losing money are as great as earning money.

Four Advantages to Saving with CDs

When considering the true value of CDs for building your savings, you are really weighing two basic considerations: 1) whether or not you need access to your savings for emergencies and 2) your tolerance for risk. If you don’t have six months of living expenses saved in case of an emergency, you might want to keep your cash liquid with a savings account or MMA. If you are risk-averse but want to get a higher return on your savings, then investing in CDs could be the right move.

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When you talk to your investment expert, consider these advantages:

1. There are CDs to suit every type of saver. Certificates of deposit come in all shapes and sizes for all types of savers. Short-term CDs are considered to be any investment that lasts less than a year. They usually range from three to 12 months. Although this could be a useful vehicle to save for a planned expense, such as a vacation or a major purchase, the interest rates will be lower and you might even get the same or better rates from a savings account. Mid-range CDs have terms of one to three years and offer better rates. Long-term CDs typically yield the highest returns. Credit unions tend to offer higher interest rates, sometimes as high as 3 percent. The only caveat with long-term options is there may be a minimum balance requirement.

2. They are insured by the U.S. government. Certificates of deposit are one of the types of savings accounts protected by the government. At credit unions, the National Credit Union Administration (NCUA) insures share certificates (the credit union version of CDs). Unlike other types of investments, such as stocks, bonds, mutual funds, securities, and annuities, share certificates are insured dollar-for-dollar by the NCUA so there is no risk of losing your savings.

3. Some CDs have fixed interest rates and are not subject to market fluctuations. There are both fixed- and variable-rate CDs. Fixed-rate options will deliver a guaranteed percentage of interest over the life of the CD. Variable-rate options fluctuate with the market, which generally means their yields are lower and you may actually lose money when you factor in inflation. With fixed-rate CDs, you know exactly how much you will earn.

4. They can reduce your temptation to spend. If you have difficulty saving for the future, CDs could be a good way to keep you from spending. All CDs carry a penalty for early withdrawal, which is a clear disincentive for cashing in your certificate of deposit unless it’s absolutely necessary. When you develop a savings strategy to pay for college, a new addition on the house, or some other major expense, locking your money away in a CD could be the best way to ensure it’s there when you plan to use it.

How to Include CDs in Your Savings Plan

Certificates of deposit can be great savings tools, but you shouldn’t consider them the only tool. They can be a great tool for locking away money for later, but they need to be part of a balanced savings plan.

Talk to your credit union financial advisor about savings options. Credit unions have multiple types of share certificates (i.e., CDs) with terms that suit your needs and your savings strategy. Balancing certificate savings with savings accounts, MMAs, and even investments to create a diversified strategy will allow you to maximize the return on your money while still being prepared for a financial emergency.
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