A certificate of deposit (CD) is a smart savings product that offers a fixed rate of interest in exchange for committing a certain amount of money for a specific period of time. While it’s possible to withdraw the money early, it’s generally not advised due to the high interest penalties.
CDs come with different terms ranging from 3 months to 60 months. The right term for you depends on your goals, desired rate of return, and future plans for the money. If interest rates are increasing, it’s advisable to avoid long-term CDs. On the other hand, if rates are decreasing, locking in a good rate for an extended period can be beneficial. In stable rate environments, CDs longer than 12 months can provide a slight premium over savings accounts.
CDs are offered by almost all banks and are considered a safe place to store your money, especially if they are FDIC insured. However, inflation is the primary risk associated with CDs. Inflation can often outpace the inflation-adjusted return on a CD, eroding the value of your money over time. This risk is particularly relevant for longer-term CDs opened in low-interest rate environments.
How Interest is Paid
The method of distributing interest earned on a CD varies by bank. Some banks pay interest monthly, others pay semi-annually, and some pay at the maturity of the CD. One advantage of branch-based banks is that you can walk into the bank and receive your interest that day in the form of a check. Online banks, on the other hand, typically use electronic funds transfer or mail checks.
CDs have become less popular since the financial crisis in 2008 due to the significant drop in yields. However, they can still be an attractive option for savers looking to safeguard their cash. Online banks generally offer better rates for six-month CDs, but these accounts must be opened online. You can view online bank rates to compare your options. When interest rates are falling, it’s advisable to lock in high rates with longer-term CDs. Conversely, when rates are rising, it’s best to avoid long-term commitments.
Advantages of Branch-Based CDs
- Convenience: Access to your CD and interest by simply visiting the bank.
- Personalized Service: Face-to-face interactions with bank representatives.
Disadvantages of Branch-Based CDs
- Lower Interest Rates: Branch-based CDs often offer lower rates compared to online banks.
- Limited Options: Branch-based banks usually have a smaller range of CD products.
Remember, all banks listed on BestCashCow are FDIC insured. It is strongly recommended to stay within FDIC insurance limits. For more information, visit the FDIC website. To explore other income-generating investment options, check out the Income Generating Investments Comparison Chart.