You will get many benefits if you invest in certificate of deposit (CDs) accounts. But it also has some risks. Understanding the pros and cons associated with CD is important to open a CD account. So examine the below mentioned pros and cons of CD and make an informed decision.
Fixed Rate Of Interest:
When you will open a CD, you will decide how much you wish to invest and for how long. There are many banks that will also let you open a CD account online. In return you will be receiving a fixed rate of interest.
Your funds are safe when you invest in CD. The Federal Deposit Insurance Corporation will insure CDs up to $250,000. The federal government will give you a guarantee that you will never lose the principal. As a result, CDs are less risky than bonds, stocks or any other investments that are more volatile.
It is an investing strategy. In this ladder options, a customer actually invests in CDs of increasing lengths (1 year, 2 years and so on). This allows the investors to tap into the customer’s money along the way. Some of it is also kept invested for a longer duration.
CDs are more definite than any other investments. When you will invest in a CD, there will be no question that how it will work or for how long you require to keep it. You will be investing a certain amount at a locked rate for a certain time. For example, $10,000 @ 2.25% for 1 year. You will be aware of how much return you will get at the year’s end: $10,225.
Options For Interest:
You should never assume that the interest that will be earned on a CD, can be collected only once it gets matured fully. This is because there are several banks that will let customers to select to receive the interest earned very often (monthly or may be annually). If you select monthly, then each month you will be paid the interest and can select to reinvest it in your CD account in order to earn more interest. You can also send the interest paid to a separate account with no penalty.
Locked Rate Of Interest:
The rate of interest gets locked in for the CD term. Even if there are too much market fluctuations, then also the CD rates are never variable, until it is time for withdrawal or rollover. Stability along with low risk is CD’s selling points. Thus it makes potentially beneficial variability unavailable on the basis of the financial climate.
If you have a savings account, then your money will be easily accessible during any financial emergency or any change in your spending priority. But with CDs, you will never be able to withdraw your money whenever you wish. If you do, you need to pay a penalty. Most of the banks will be charging you some of the accrued interest. It may also be part of the original investment, if you make up your mind to withdraw early. Such penalties mean a loss of interest or may be loss of the original investment.
Miss Other Investment Opportunities:
Your money will be tied up if you invest in a CD. So you would not be able to transfer it to any other financial product even if it will give you a higher return during the change of interest rates. Since you are locked in you will not be losing anything but you will not be able to either increase the interest margin.
CD rate of interest can sometime struggle a lot to keep up with the inflation. CDs never pay sufficient to keep up with the inflation rate. So if you invest in CD, you will be losing your standard of living with the passage of time. When inflation will rise, dollar value will be going down. So if you make an investment of $1000 in a CD for 1 year along with a rate of interest of 1.5% and if the inflation rises 1.9% in the same year, your money will become less valuable at the year’s end. In such a scenario, it will be much better to keep the money in a much flexible savings account that has a high rate of interest. You can also look out for an investment that will have a chance of giving better results than a CD.
So when it is about CD investment, the pros and cons will be related to predictability as well as flexibility. You can find the balance between those two that will work the best for your financial condition.