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A CD can come with a predictable return and a higher interest rate than many savings accounts offer. Read on to see why you may want to invest in one.
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In 2022, just 6.5% of Americans owned certificates of deposit (CDs). That’s a really small percentage of people who have this investment.
While CDs may not be the most popular asset to buy, there are a few really good reasons why you might want to own one. In fact, here’s why putting some of your money into a CD could be a smart move for you.
1. CDs are safe investments
A certificate of deposit is not a risky investment. When you buy a CD, the bank or financial institution offering it promises you a guaranteed return on your investment (ROI). As long as you don’t take out your money early and get hit with penalties, you will get the ROI you were offered upfront. You will definitely get your invested funds back, plus the interest that you were expecting to earn. So there won’t be surprises.
Generally, CDs are also FDIC insured up to $250,000. So if you choose an FDIC-insured CD, not only do you get your money back that you invested if the bank fails, but you also get any interest that you’re due to be paid up until the date the bank defaults. So, the government is guaranteeing you’ll get your funds. That means you can’t lose when you put your money into a CD.
2. You can usually earn a higher return than you could with a savings account
CDs are as safe as savings accounts, although they are not as liquid — you can’t just take your money out whenever you want if you invest in a CD.
In exchange for agreeing to lock up your cash for the length of the CD term, you usually do get a higher ROI than you would with a savings account. In fact, the table below shows the average interest rates for savings accounts versus CDs, according to data from the FDIC from Dec. 18, 2023.
Many CDs and many high-yield savings accounts currently offer rates well above these averages, but even when comparing these two products, CDs tend to beat out savings in terms of your ROI.
Plus, savings account rates are variable and will go down if rates fall, while your rate is locked in for your entire CD term. So, if you want a higher-yield product and you want to ensure you keep your higher rate for a while, a CD may be a better bet.
3. You have flexibility in how long you’ll need to lock up your money
Finally, there’s another benefit to CDs. You have flexibility in how long you’ll commit. While it may seem scary to agree to lock up your money and not take it out for the CD term, there are many CD options with terms as short as three months, and some financial institutions even offer 1-month CDs. So, you don’t necessarily have to make a huge time commitment.
Ultimately, if you have some money you may not need for a little while — either a few months or a few years — you may want to seriously think about using it to buy a CD. Research the best CD rates out there to see if any of these great financial products could work for you.
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