What Is the Real Value of Certificates of Deposit (CDs)?

Financial security starts with saving money today to ensure that you’re prepared for anything that could happen down the road. That means not only putting money into a savings account where it’s secure and can earn interest, but also creating a diversified investment strategy that will help you make the most of your money.

When choosing where and how to invest your money, you have a wide range of options that vary in risk. In general, the higher the yield on any given investment, the greater the risk. For example, if you invest your money in stocks, bonds, and mutual funds, you could see a return of 10 percent over 20 years. However, your investments are not secured by the federal government, which means you could lose money if the market does poorly.

In general, the more diverse your investment strategy, the safer it is. To balance out your riskier investments, consider putting money in a secured investment, such as a money market account or a certificate of deposit (CD). CDs currently earn less than 3 percent and savings accounts typically earn about 0.01 percent. The benefit is that bank accounts are insured, so there is far less risk. To protect yourself as you build wealth, aim to invest some money in higher-risk investments, but keep your nest egg safe by also putting money in a savings account or a certificate of deposit.

How to Think About Investing in CDs

When deciding how to diversify your investment strategy, you first need to know how much you have available to invest. Consider how much money you may need for important expenses such as emergencies, your child’s education, or a home. When you know how much money you’ll want to have on hand at different life stages, you can make smarter choices in your saving and investing strategy.

As you look at investment options, you’ll find that some allow you to access your money anytime and others are less accessible. If you’re building up your emergency fund, you’ll want to put that in an account where it can be used immediately if necessary. Savings and money market accounts are great options for emergency funds because your money is always secure and readily accessible.

If you have money beyond your emergency fund that you wish to invest, you have a variety of options. You can earn more interest on your money with stocks, bonds, and other investments, but your funds will be harder to access. If you suddenly need access to cash, it could take a few days to liquidate your investment holdings and receive the money in your account. More importantly, investing in stocks and bonds tends to be riskier and less secure, which means you could lose money. Investments fluctuate with the market, so if you buy when the market is high and sell after it has dropped to a lower price, your investments will be worth less. It can take years for stocks to show a substantive profit, which is why investments are normally a long-term strategy.

Certificates of deposit are one way to enjoy the best of both worlds. Like savings accounts, CDs are insured by the SEC, so there is no risk of their losing value. And like investing in the stock market, CDs are a longer-term investment strategy. Because you are committing your money for longer periods of time, CDs yield a higher interest rate than savings accounts.

The Benefits of CDs

Certificates of deposit are available with different rates for different terms, but they all have similar functions. When you buy a CD, you are committing to depositing your money for the full term of the certificate in exchange for a higher interest rate. If you buy a 24-month CD, for example, you leave that money deposited for two years until it matures. Once it matures, you can access your money again or choose to convert it into another type of savings. The price you pay for the benefit of the higher interest rate is that if you withdraw your money early, you’ll have to pay a penalty fee.

What makes CDs attractive is that they are secured with a guaranteed increase in value, so you can rest assured that you won’t be losing money. CDs are also a great way to get into the habit of saving because the penalties act as a deterrent from dipping into your nest egg.

Another benefit of CDs is that they have a fixed interest rate, so you will know exactly how much they will earn when they mature. Also, whereas you have to pay a brokerage fee or a percentage of earnings with investments, CDs are typically free.

Certificates of deposit come with various terms ranging from a few months to years, and the length of time you choose may depend on your savings goal. For example, you may consider a short-term CD to save money for an upcoming vacation, and use long-term CDs for a college or retirement fund.

If you aren’t sure which type of CD is right for you, your banker or financial advisor can help you identify the best choice based on your needs and goals.

However you choose to plan for the future, make the most of your savings. Create a diversified savings strategy that includes some higher-risk and higher-yield investments, as well as secure savings, such as a CD. With the right mix of investments, you can build wealth at the level of risk that works best for you.

First State Community Bank has a diverse range of CDs available. Interested in learning more? We’d be happy to help you create a savings plan that will secure your future.

Visit FSCB's Financial Resource Center

Comments (0)