Maybe you’re saving for a down payment, an emergency fund, or a rainy day. Whatever your motivation, you may be wondering where it makes the most sense to “park” your money.
A certificate of deposit, or CD, is a popular choice for many and it’s easy to see why. CDs offer a fixed annual percentage yield (APY) for a specific term length, so you don’t have to worry about a decreased rate during the entire CD term.
Before you settle on a CD though, make sure you have the full picture of how they work and if your savings strategy can benefit from them.
1. CDs Offer Predictable Returns
The first key point you should be aware of is how a certificate of deposit offers certainty. Your interest rate is locked in for the full term when you open a CD. This means you know exactly how much you’ll earn and when your money will be available.
This predictability can be helpful if you’re saving for a specific goal with a clear timeline.
2. Your Money Is Tied Up for a Set Period
Unlike a traditional savings account, a CD requires you to leave your funds untouched until the maturity date. As mentioned, terms can range from a few months to five years or longer.
Yes, you can withdraw the funds before the maturity date, but If you do this too early then you’ll likely face an early withdrawal penalty. Make sure you choose a term that aligns with when you need access to the funds, so you can avoid costly withdrawals.
3. CD Rates Are Often Higher Than Regular Savings Accounts
CDs typically offer higher interest rates compared to standard savings accounts because you’re agreeing to keep your money in place for a fixed period. For example, many of the APYs offered for Space Age’s certificates are at least twice the national average or more.
When interest rates are strong, locking in a competitive CD rate can be an appealing way to grow your savings with minimal risk and predictability.
4. CDs Are Considered Low Risk
Certificates of deposit offered by banks and credit unions are generally insured up to applicable limits, making them a low-risk option for savers who want stability. CDs can provide peace of mind compared to more volatile investment options if preserving principal is a top priority
5. You Can Build a CD Ladder
If you’re unsure about locking up all your funds at once, a CD ladder can offer flexibility. This strategy involves spreading your savings across multiple CDs with different maturity dates.
As each CD matures, you can reinvest the funds or use the cash as needed, giving you both liquidity and steady returns.
6. CDs Can Work Within a Broader Plan
While CDs can be a great tool for short- to medium-term goals, they’re not always the best choice for long-term growth, especially when compared to investments like stocks or retirement accounts. Many savers use CDs alongside other accounts, such as high-yield savings accounts or IRAs, to create a balanced financial plan.
Certificates of deposit can be a smart place to grow savings you don’t need immediately, but make sure you understand their benefits and limitations and if they work for your financial goals.
