There’s no doubt that certificates
of deposit are one of the safest investments out there. But like
any other investment, CDs have strengths and
weaknesses that investors should consider before tying up their
- Safety: CDs from
federally insured banks are backed by the full faith and credit of
the U.S. government up to $250,000. It amounts to bank-subsidized
investment insurance and is a major benefit to CD investors.
- Better return than savings
deposits: Because CD account holders can’t take their money
back at a moment’s notice like savings account holders can, CDs are
more valuable to banks than savings deposits. Banks accordingly pay
CD investors a premium for locking their money up in the form of
- Wide selection: CDs are
available in an assortment of maturities and terms from thousands
of different banks and credit unions. This diverse set of options
helps investors find a CD that fits their needs.
- Fixed, predictable return:
Unlike savings deposits, savers can count on CDs to deliver a
specific yield at a specific time. Even if interest rates fall
precipitouslyin the broader economy, your rate will remain constant
for the term of the traditional CD.
- Limited liquidity: One of a
CD’s major drawbacks is that owners can’t easily access their money
if an unanticipated need arises. Usually they’ll have to pay a
penalty, which can come in the form of lost interest or even a
principal penalty. One way CD investors can increase their
flexibility is to create a CD ladder composed of CDs of
differing maturities, so portions of your CD savings will be
available at regular intervals.
risk: CD rates tend to lag rising
inflation on the way up and drop more quickly than inflation on the
way down. Because of that, investing in CDs carries the danger that
your money will lose its purchasing power over time as your
interest gains are overtaken by inflation.