Are CDs Right for My Savings Strategy?
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Certificates of Deposit (CDs) can be ideal vehicles for investing funds that you do not need in the near term. CDs are promissory notes issued by banks and are classified as time deposits with maturities ranging from 30 days to as long as ten years. The most popular terms are from 90 days to five years. Since CDs are time deposits, they usually offer higher interest rates than savings accounts, but they have penalties (often 90 days of interest) for early withdrawals.
Advantages of Traditional and Jumbo CDs
- A fixed interest rate - When you open a CD account you keep your money in an account for an agreed upon amount of time (or term) and you receive a fixed interest rate. This rate is typically higher than savings, checking, or money market accounts.
- Higher returns - The average return is typically higher than a traditional savings account.
- Predictable returns - Unlike other investments, CDs are considered one of the safest savings options since they are not subject to market risk like stocks.
- Laddering strategy or laddering of maturities - This is a CD investment strategy where you invest in CDs of increasing terms - 1 year, 2 years, etc. This allows you to tap into your money along the way while keeping some of it invested for a longer period. For example, instead of buying one five-year CD, buy equal amounts of one, two-, three-, four- and five-year CDs. As each CD matures, you then reinvest the proceeds into a five-year CD. While you would not have as high of an initial rate, over time all your funds would end up in higher rate five-year CDs and you would have annual liquidity of one-fifth of your funds. If rates rise, you will take advantage of the higher rates with new purchases. If rates fall, you still have the initial higher-rate CDs that you already own.
What are some disadvantages of CDs?
- Less Flexibility - Rates for CDs are fixed, meaning if the rates are low when you invest your money in one, the rate will stay the same throughout the duration of the CD’s term. However, if you are able to deposit money into a CD account when rates are favorable, you will enjoy that rate throughout the duration of the term.
- Early-withdrawal penalties - If you need to access the funds in the CD account before the term ends, you will incur fees to cover the loss of interest to date. If you think you may need to have access to funds, you may want to consider investing your money in other types of accounts that don’t have withdrawal restrictions. Or consider depositing a smaller amount in a CD and the remaining funds into an account that does not have withdrawal restrictions.
What terms are available with CDs?
Traditional CDs can be available for as short of a period as 7 days and up to five years. Sometimes a shorter term is advantageous if you have a large amount of money to deposit and need to use it for another purpose within a short window of time. Funds in a CD account can earn a higher interest rate than a traditional savings or checking account.
How do you choose the right CD for your personal savings?
Consider the amount of money you can deposit and if you may need to access those funds at any time. Carefully review available rates and terms and remember not every option with a higher rate is the best option for you and your savings needs.
What about FDIC Insurance?
TowneBank is an FDIC insured bank and CDs are insured up to $250,000 by the FDIC. If you have more than $250,000 in deposits, we encourage you to talk to your banker about our CDARs program, which is an easy way to access FDIC insurance on principal and interest on amounts larger than the $250,000 threshold held at one bank. With CDARs, large deposits are dispersed in smaller amounts across a network of participating banks, but you can still manage your money at one bank.