Everything You Need to Know About Certificates of Deposit - Part Three: Advantages and Disadvantages of a CD

Feb 25, 2020

  • Savings Accounts
  • Banking
  • Certificates of Deposit

Purchasing a certificate of deposit creates great savings opportunities, but they aren’t for everyone. To help you decide if a CD is right for you, here are some advantages and disadvantages to consider.

Advantages of a CD:

  • Better interest rates than regular savings accounts. Since the financial institution you get the CD through knows that your money will not be withdrawn over a certain period, they can give you a higher interest rate than their normal savings accounts.
  • Security. CDs are FDIC insured, making it a low-risk investment.
  • Easy to obtain. You can walk into almost any bank or credit union and buy them over the counter. The minimum amount needed to invest, and the interest rates given will vary from institution to institution so you may want to do your homework.
  • Wide selection. There are many types of CDs available with various terms and maturities, to fit your specific needs.
  • Fixed return. Financial planning is easier, knowing that your investment will grow at a specific pace over time, regardless of the changing economy.

Disadvantages of a CD:

  • Limited liquidity. Once your money is placed into the CD, it stays there for the entire term. Should an emergency arise where you need to withdraw money from a CD, a penalty will be applied. The result can mean sacrificed interest or loss of principal.
  • Low returns. While CDs are low risk, they are also low yield, falling behind the returns on other investment products like stocks and bonds.
  • Inflation risk. If your rate lags behind the rate of inflation over the term of your CD, you run the risk of your money, losing its purchasing power over time as interest gains are overtaken by inflation.

Whichever type of CD you choose, you can be confident that your investment will be safe, and the return on your investment will generally have a guaranteed rate for the length of the term. The guiding principles for any investor in a CD, is to determine how much cash they can invest and how long they can go before needing the cash back. CDs offer a safer alternative to the stock market and a higher rate than a savings account, which makes them very appealing to many investors.

If you want to know if a certificate of deposit is the right savings solution for you, give the experts at NASB a call at 800- 677-6272. Look for more excerpts from our eBook, Everything You Need to Know About Certificates of Deposit in upcoming blogs.