Why are Certificates of Deposit Becoming so Popular?
After a year of surging prices, members are still grappling with the effects of rising inflation. Add in the rocky performance of Wall Street, and people are looking for a silver lining. One such opportunity is beginning to shine as savings rates also start to climb – it’s called a certificate of deposit (CD).
Certificates of deposit, also known as share certificate accounts among many credit unions, are investment accounts that yield higher returns than traditional savings accounts. They offer a spectrum of financial perks with very little downside. Keep reading to find out if adding a CD to your savings plan is right for you.
What is a Certificate of Deposit?
Most credit unions and banks offer three primary savings and investment accounts:
- Traditional savings accounts
- Money market accounts
- Certificates of deposit
Among the three, certificates of deposit generally offer the greatest yields. However, there is a tradeoff in exchange for earning higher dividends. With a CD, your money is locked in, meaning you cannot access or withdraw your funds (without incurring a penalty). While this account characteristic might seem like a drawback, it’s often a blessing in disguise because it forces you to save money.
How Does a Certificate of Deposit Work?
Because your money is locked in for a designated period, CDs are broken up into varying terms. For example, you’ll often see certificates of deposit displayed in the following fashion:
|Certificate of Deposit Term||APY or Dividend Rate|
Characteristics of CDs:
- While terms vary by the financial institution, they typically range from six months to five years.
- Generally, the longer the term, the higher the rate of return you will earn.
- Your funds are locked in during your term. You can access your funds, but you will be required to pay a penalty (usually a portion or all the interest earned to date).
- Most CDs require a minimum deposit, such as $500 or $1,000.
- Some financial institutions offer Jumbo CDs, which offer higher rates in exchange for much larger deposits – often $50,000 or more.
Advantages of Certificates of Deposit:
- There is essentially no risk when investing in CDs. Your account is either federally insured by the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
- With guaranteed returns, they are an excellent alternative to the rollercoaster ride in the stock market.
- Dividend rates are generally fixed, meaning you’ll know exactly how much your investment will return over the life of its term.
- In an emergency, you can withdraw funds from your account quickly and easily. However, depending on the financial institution, you’ll likely incur either an early withdrawal fee or forfeit a portion of the earnings on your account.
- CDs force you to save money by locking in your funds until the end of your chosen term. You cannot dip into this account for frivolous spending like you could with a traditional savings or money market account.
- When lenders are low on funds to loan out, they will often raise money through CD promotions. Consequently, you might be able to score a much higher rate than current market returns through bonus incentives.
Drawbacks of Certificates of Deposit:
- Your money is locked in during your term. If other investment opportunities come up, interest rates rise, or you need access to your funds, you cannot withdraw the money without incurring a fee or penalty.
- Inflation causes interest rates to rise. If your money is locked into a long-term certificate, you could lose out on rising interest rates.
Wise Ways to Use Certificates of Deposit:
CDs are versatile investment accounts that can earn a good return with no risk. While the higher dividends are nice, it’s the fact that your money is locked in that helps so many members. By being forced to save, you’re more likely to achieve your financial goals.
Here are several strategies for using certificates of deposit to your advantage:
- Diversify Investments: A well-diversified investment portfolio is a winning strategy for any investor. Adding CDs to your portfolio during a rising rate environment will yield strong dividends without the market risk.
- Conservative Investments: If you’re nearing retirement, it might be time to tone down your risk tolerance and move toward a more conservative investing approach. CDs will yield favorable dividends without unnecessary market risk.
- First-Time Investments: CDs are a great first step if you’re ready to start investing but don’t have the stomach for potential market losses just yet. They teach you not to touch your money for extended periods and let it grow through compound interest.
- Mid-Range Financial Goals (1 to 5 Years): Because your funds are locked in, CDs are the perfect way to save for future financial goals, such as:
- A down payment or closing costs on a new home.
- A college fund for your child.
- A dream vacation for your family.
We’re Here to Help!
While no one enjoys periods of high inflation, there are opportunities in everything. Right now, yields are climbing higher, and certificates of deposit are making a strong comeback. These popular accounts might be the perfect tool to help boost your investment returns without added risk.
If you want to learn more about certificates of deposit or are ready to open an account, we’re here to help. Please stop by any of our convenient branch locations or call 801-451-5064 to speak with a team member today.