Savings primer: benefits of a 1-year CD

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Low interest rates present a challenge, so it’s important to carefully compare savings products such as a one-year CD. A certificate of deposit is one of the safest investment choices available, since deposits with banks are insured by the Federal Deposit Insurance Corp. to $250,000 per depositor. Credit unions are covered by the National Credit Union Association.

Definition of a 1-year CD

A one-year CD is a certificate of deposit that extends for an entire year. Investors commit to a minimum deposit and must stay in the instrument until the maturity date or pay a penalty.

Advantages of a 1-year CD

Interest rates vary according to the term and sometimes by the amount of the deposit. In general, the longer the term, the higher the interest rate. A one-year CD appeals to many savers because the rate will be higher than for a short-term CD, yet the money is invested for just one year.

Penalties apply for early withdrawal of the funds in a CD. However, this can be an important incentive to let your savings grow with interest.

Disadvantages of a 1-year CD

While a one-year CD is a safe investment, it has a couple of disadvantages: First, because it is a virtually risk-free investment, the return can be low. Second, the money placed in a CD cannot be withdrawn without a penalty. If interest rates rise or another investment seems more lucrative, the funds will not be available without incurring a cost.

Who benefits most from a 1-year CD?

Savers seeking a safe, relatively short-term investment benefit most from a one-year CD.