Should You Add Money To A CD?
It’s easy to see why a CD (certificate of deposit) is a good choice for investing your savings: As of the first quarter of 2022, you would be lucky to find a high-yield savings account paying 0.7% APY. CDs? They’re paying somewhere in the vicinity of 1.85%.
You can open a CD at a bank or credit union, and it’s worth noting that local, smaller banks or credit unions often offer higher rates than large national institutions. Because they have lower operating expenses, online-only banks can sometimes offer great deals that can’t be had at bricks-and-mortar institutions.
But before you say give up on a savings account and hop on the CD bandwagon, it’s important to know exactly what a CD is, how it works, and the different types available to you.
The ABCs of CDs
If you’re putting your money in a CD, know this: You’ll be agreeing to let the bank hold on to your money for months, perhaps years, depending on the CD’s term. On average, CDs are available with six-month, two-year, or five-year terms; the longer the term, the higher the interest rate. While the payout from a long-term CD can be significant, bear in mind that you’ll be locking away your money for a significant period of time. Withdrawing money from a CD before the full term is up could result in costly penalties.
A Good Choice…
For several years, CD rates have been on the low side, but that could all change this year.
If the past is any indication, CD rates have increased when the Federal Reserve raises its key policy rate, which officials have indicated they’re planning to do several times throughout 2022. Consequently, CDs may offer better investment opportunities when compared to not only savings accounts but also other types of investments.
In addition, CDs remain practically risk-free. For example, you can invest up to $250,000 in CDs and rest assured that you’ll never lose the money – so long as your account is with an NCUA insured credit union or an FDIC insured bank.
…Or A Bad Option?
It appears that CDs may become more profitable in 2022, but that doesn’t mean you’ll be raking in the dough from this investment option. A CD with a 1% interest rate won’t really add to your wealth when you’re staring down a 4.3% inflation rate this year.
You also stand to lose if you withdraw your money early from your CD; you’ll most likely have to pay a penalty that equals a portion of your interest. Closing out a one-year CD too soon could cost you six months’ worth of interest, while the penalty for early withdrawal from a five-year CD could be the equivalent of a full year of interest.
In addition, interest rates could rise while your money is safely ensconced in a CD, which means your savings will be missing out on earning more interest in another investment option.
Choose The Right CD Type
There’s more to CDs than the traditional, fixed-rate option. You can choose to invest your money in the following types of products:
- Liquid CDs – This allows for easy withdrawals that can be completed without financial penalty.
- Variable CDs – Interest rates on these CDs rise or fall according to a benchmark such as the Consumer Price Index, S&P 500 performance, or the prime rate.
- Bump-up CDs – Enable you to take advantage of rising rates by allowing for a limited number of interest “boosts” during the CD term.