Why CDs Are A Good Investment

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Don't let your money wallow in a low-interest savings account. Put it into a certificate of deposit and watch your savings explode.

Placing your money into a savings account is obviously a great idea. But there are much better things that you can do with your savings than let it collect pennies in interest.


Put your money into a high rate certificate of deposit and reap the benefits of higher interest rates.


A certificate of deposit, or CD is like a savings account in that it is FDIC insured and basically risk free. The difference is that it has a fixed term and a fixed rate. If you withdraw your money before it "matures" you will have to pay a penalty-usually some percentage of your interest.


If you have just been instinctively parking your funds in your bank account for all these years, it's worth your while to explore the benefits of CDs.


How exactly is a CD different from a regular savings account?

  • It's a one time deposit.
  • You can't get the funds out until the CD matures.
  • The rate is locked in at the time that you get the CD.


What are the real benefits of a CD?

  • The biggest benefit is a higher rate of return via higher interest rates.
  • Your interest rate is locked in and will not fluctuate due to the market.
  • If you are an impulse spender and/or will have those funds stashed in an account anyway, it's a no-brainer.

       So, why doesn't everyone put their money into CDs?  

  • The number one reason is that a CD locks your money in for a set period of time making it a questionable investment choice if you have an emergency.
  • If you close your CD before it matures, you are docked your interest, sometimes even if you haven't had a chance to earn that interest. This could result in a reduced principal.

Is a CD a good way to grow an emergency fund?

Yes and no. The benefit of an emergency fund is that it is easily available in the case of an emergency. Unless you can absorb the penalty from an early withdrawal, there might be better options for your emergency funds.


Where to get a CD?

As long as the CD that you plan to buy into is FDIC insured, it doesn't really matter where you get it. Many online sites like mortgageloan.com can tell you what CDs currently have the highest interest rates.


Online sites like .ING are very popular because of their low rates, but it also pays to look at local banks and credit unions as their rates are often competitive.


Overall, CDs are an excellent way to get a better rate of return on money that would otherwise sit in your bank account. Sure, you're not going to get rich off of a 3-5% interest rate over a 1.5% interest rate, but it's better than what you would have been getting otherwise.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Banking and Loans

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