The decision to save money is a smart one to make, but in many cases it is easier said than done. Once you do have money to put away, it’s sometimes hard to settle on a place to put it. A certificate of deposit (CD) account is one option to consider—explore whether opening a CD account is the right move for you at this point in time.
Out of Sight, Out of Mind
If you have a hard time holding onto money, a certificate of deposit is a wise choice because it encourages you to commit to saving. If you withdraw the money before the account’s expiration date, then you are penalized with fees. Also, you cannot make tiny withdrawals from a CD account as you would with a standard checking or savings account—if you decide to make a withdrawal, you must close the whole account in most cases.
Rates
Certificate of deposit accounts used to have very attractive rates, but have been on a steady decline since 2007. According to Market Rates Insight, the average interest rate on 5-year CDs dropped below 1 percent in August 2012, which is very low compared to other options. So if your main goal is to earn as much interest on your money as possible, this may not be the right choice.
Timeline
Do you have a specific date in the future when you will need the money for an important purchase, such as putting a down payment on a home or buying a car? If so, banks give you the option to mature the CD account at a certain point in time, such as six, 12 or 36 months into the future.
Safe Savings
A CD account is a relatively safe way to save. When you open a certificate of deposit at a reputable banking institution, your deposits are backed by the FDIC. A CD account is not considered an investment fund so you do not have the risk of experiencing losses as the market changes.
Alternative Options
You have other options for making your money work for you. Some are more risky than others. For one, bonds are considered safe investments because they are commonly tied to established public agencies or public projects. Another option on the opposite end of the spectrum is to invest the money in a mutual fund or in a personal business idea. These last two options are riskier than putting money away in CDs, but they also come with a higher potential rate of return.
Resources:
bankaholic.com/finance/cd-rates-enter-3rd-year-of-steady-decline/
bankrate.com/financing/cd-rates/low-loan-demand-low-cd-rates/
fdic.gov/deposit/deposits/certificate/