A Certificate of Deposit (CD) is a specialized savings account that holds your deposited funds for a specific term. The term could be as short as a few months and as long as ten years. Over that term, your savings should accumulate interest. Once the term is finally up, your account is considered matured and you can access your savings.
If you’re thinking of opening up a Certificate of Deposit, you should read this brief list of pros and cons first.
Pro: Higher Interest Rates
Most savings accounts will come with interest rates to help the user’s deposits grow over time. With a standard savings account, that interest rate will be quite low. You may see an annual percentage yield of under 1%. Certificates of Deposits come with much higher interest rates. Typically, the APY is between 4-5%. So, your savings will see more growth in this type of savings account.
The length of your CD’s term can impact the interest rate you receive. The longer the term, the higher your rate will likely be.
Con: Inaccessible Funds
When you use a CD, you agree to lock away your savings for a set period of time. Until your account has matured, you won’t be able to access the savings inside. This is why it’s not a good idea to put the entirety of your emergency fund into a CD. You won’t be able to withdraw your funds from your CD at a moment’s notice, and you can’t be sure that you won’t face an emergency expense before your account fully matures.
If you make the mistake of putting all of your emergency savings into a CD, you might not have enough funds to take care of an urgent, unplanned expense. In that case, you would have to rely on an alternative payment method to resolve your emergency.
You could charge the expense to your credit card, or you could try to apply for personal loans that are available in your home state. So, if you live in Dallas, you could search for loans in Texas and check to see whether you meet all of the eligibility requirements. If you’re eligible for that Texas loan, you can fill out an application and wait to learn about your approval status. With an approved loan, you could pay off your urgent expense and move forward.
Pro: A Safe Investment
Putting your savings into a CD isn’t like investing in a new cryptocurrency. A CD is a very low-risk, safe investment. Even in the worst-case scenario, where a bank fails, your deposits shouldn’t disappear into thin air. As long as your bank is FDIC insured, the contents of your CD will have coverage for up to $250,000. You can still retrieve those funds if the bank goes under.
Con: Early Withdrawal Penalties
As previously mentioned, your CD’s balance is locked away until it matures. It’s not accessible. Or at least, it’s not meant to be accessible.
If you’re desperate to access the balance in your CD before it’s matured, you can. However, you will be hit with an early withdrawal penalty for doing so. Your bank will charge you a penalty in the form of several months’ interest. If you’ve taken out a long-term CD, this penalty can be significant.
Some banks will offer no-penalty CDs — these will not charge users penalties whenever they make early withdrawals. To compensate for this benefit, no-penalty CDs tend to have lower interest rates.
You’ve seen the pros and the cons of opening up a certificate of deposit. Do you think that this is the right savings tool for you?
