Is a certificate of deposit right for you?
While CD rates are frustrating many savers, a certificate of deposit may still be a wise choice for some consumers. Ask yourself these three questions to help determine if a CD is right for you.
What is your investment objective?
Before you select a certificate of deposit, think about the reasons for your investment. Are you planning for retirement? If your savings goal is far in the future, keep in mind CD rates generally struggle to keep pace with inflation rates. However, if you are already in retirement, accruing interest in a CD can provide you with additional spending money.
Are you a risk taker?
CDs are low-risk investments. If the potential for losing money in the stock market would constantly worry you, a CD can make a strong fit for your portfolio. With fixed interest rates, you can estimate your annual yield, and you won't have to go to bed with falling figures dancing in your head.
Are you strapped for cash?
Before you search for CD rates, determine if you have an adequate emergency fund in case of unexpected scenarios. If you have any concerns that you may need early access to your funds, a certificate of deposit may not be the right choice. Bankrate's 2010 Early Withdrawal Penalty Study shows that banks can hit you with a hefty fee if you remove funds before the scheduled maturity date.
Ready to enter the world of CDs? Consider a laddering strategy to maximize your return. By spreading your money across a range of maturity dates, a ladder can help you take advantage of the most attractive interest rates while keeping some of your money in more readily accessible CDs with shorter terms.