When to consider opening a 2-year CD
Consumers often look for that perfect combination: a safe investment that earns more interest than a typical checking or savings account. A 2-year CD can be a good fit for many. Certificates of deposit are one of the safest investments available and are guaranteed up to $250,000 per depositor by the FDIC.
Definition of a 2-year CD
A 2-year CD is a certificate of deposit, usually with a minimum deposit requirement, that earns interest for the term of the instrument. CD investors can choose to have the interest earned deposited into another account or kept within the certificate itself.
Advantages of a 2-year CD
CD investors earn a guaranteed, fixed rate on their funds unless they opt for a variable-rate CD. (Most CDs are fixed-rate investments.) Investors get the advantage of a guaranteed return of their principal and interest payments, presuming that they do not make an early withdrawal. In general, a longer-term CD such as a two-year CD will earn a higher interest rate than a shorter-term investment.
Disadvantages of a 2-year CD
The biggest disadvantage of any longer term CD is that your funds are tied up and therefore not available for other investments, emergency needs or to take advantage of a rise in interest rates. One solution is to "ladder" your CDs with varying maturity dates so that funds become available every few months to reinvest at higher rates or, if necessary, to spend.
Who benefits most from a 2-year CD?
People with a comprehensive financial plan can benefit from a long-term CD since they are likely to have other savings available for short-term needs. In addition, consumers with a specific savings goal with a deadline -- such as saving for a vacation, college tuition or a down payment on a home -- can take advantage of the long-term security and better yield of a two-year CD.
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