2 savings advantages of CDs

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No one would buy a certificate of deposit these days for the yield unless they have a mountain of money. But there are other reasons to love CDs. And this is not about those paltry CD rates.

Reason No. 1: Completely safe savings

The Federal Deposit Insurance Corp., or FDIC, insures bank deposits, including savings and checking accounts, CDs and money market accounts, for up to $250,000 per account ownership category per institution.

If you have more than $250,000, congratulations! You can get all your savings insured by spreading it across accounts at different banks or with varying registrations at the same bank. For instance, a couple could insure $1 million at one bank simply by purchasing a CD in their own names and then buying a jointly registered CD.

Reason No. 2: Savings incentive

Tax-advantaged retirement accounts, such as IRAs and 401(k)s, work partly through the threat of pain if you try to withdraw funds early. The pain is only symbolic in that you pay a 10 percent early withdrawal penalty and any taxes owed. Though come to think of it, I’d much prefer a couple of electric shocks to wasting money on a fee.

CDs have a similar feature: the early withdrawal penalty. Technically the bank imposes the fee because of your agreement when you buy the CD. By purchasing a CD, a saver agrees to let the bank use his or her money for a specified amount of time. By breaking the contract early, the bank has to rustle up funds to return the money. The fee works as a deterrent to breaking the CD early, which is a benefit to savers.

Impulse purchases are suddenly much less appealing with a small barrier to getting your funds. At the same time, in the event of a true emergency, you’ll be able to break into most CDs.

Why do you like CDs?

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