For those looking for investment security, a CD savings account can offer guaranteed returns that won’t fluctuate depending on the ups and downs of the stock market. Offering better interest rates than a traditional savings account, certificates of deposit require consumers to invest their funds for a specific amount of time — usually up to five years — in exchange for a guaranteed interest return. While these products provide a high degree of investment security, they come riddled with drawbacks, too. Here’s what you need to know.
Low returns
The rate of return on a CD is determined by how long you invest your money. Those who opt for longer-term products will receive a better rate of return than those who invest in CDs with a one-year or less lifespan. Regardless of how long you invest in a CD savings account, the commitment means you are giving up the chance to earn better returns elsewhere. While rates are significantly better than those of traditional savings accounts, CDs often can’t compare with the returns from riskier, more aggressive products.
Limited liquidity
Once your money is in a CD savings account, it stays there. An investor who tries to pull funds out before his CD reaches full maturity will incur an early withdrawal penalty of some, potentially all, of the interest his account has generated. To ensure your certificate of deposit actually pays off, investors should be absolutely clear on the withdrawal penalties prior to signing on the dotted line.
Choose carefully
Before committing to a specific product, investors should compare the final yield from a CD savings account to that of other investment vehicles, and thoughtfully consider whether they’re willing to forgo funds until the CD has matured. Those who want both a guaranteed return and some liquidity should consider creating a “CD ladder” by spreading their investments out over multiple certificates of deposit with staggered maturity dates.