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A certificate of deposit, also known as a CD, is a popular investment option if you’re wanting to upgrade from a typical savings account.
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Many people keep their money in traditional savings accounts because they are simple and convenient. Although these accounts earn interest, the rate is often lower than with other savings options. If you won't need to access your funds for a while, a certificate of deposit (CD) can help you earn a higher, guaranteed return.
Before you open a CD, it's important to understand how they work. Let's take a look at their pros and cons to help you decide whether a CD is the right choice for your financial goals.
A certificate of deposit (CD) is a type of savings account that is offered by banks and credit unions. It pays a fixed interest rate on your deposit for a specific period, which is known as the term. CDs typically range from a few months to several years, and longer terms often come with higher interest rates. When the term ends (the maturity date), you can withdraw your money or reinvest it in a new CD to continue growing your savings.
Unlike a regular savings account, where you can withdraw money whenever you like, a CD requires you to keep your funds in the account for the full term to earn the guaranteed interest. Although you can withdraw money early, you'll be subject to an early withdrawal penalty, which is usually a few months' worth of interest earned.
CDs are popular because they offer higher returns than other savings options, including many high-yield savings accounts. They are also stable investments that are not affected by stock market swings or economic fluctuations, which makes them a safe and secure way to grow your savings. Many people use CDs to save for a down payment on a home, a new car, major household purchases, and other needs.
It’s important to consider the certificate of deposit pros and cons before opening an account. Let’s start with the advantages. CDs offer several benefits that make them a smart choice for many needs and goals.
Here’s why many savers choose CDs:
One of the most appealing benefits of CDs is their guaranteed, fixed rate. When you open an account, your rate is locked in for the entire term, which ensures steady returns as long as you keep your funds deposited until maturity. You don't have to worry about the Federal Reserve changing the federal funds rate, stock market volatility, or fluctuations in the economy affecting your earnings. This predictability means you can know exactly how much you'll have when the CD matures.
CDs are ideal for many savings goals. Since your money is set aside, you're less likely to spend it on impulse purchases or short-term wants. This can help you stay on track when you're saving for a home, college, or another big expense.
Unlike the stock market and other investments that can fluctuate in value, CDs are a low-risk way to grow your money. They’re federally insured for up to $250,000, which means your investment is protected. CDs from banks are backed by the Federal Deposit Insurance Corporation (FDIC), while those from credit unions are insured by the National Credit Union Administration (NCUA).
CDs generally offer higher interest rates than standard savings accounts and other savings options. Unlike savings accounts that have variable rates, CDs have fixed rates, which makes it easy to know how much you'll earn.
Banks and credit unions offer higher rates for CDs because you agree to leave your money in the account for the full term. CDs with longer terms typically earn higher rates. This makes it an excellent way to save for both short- and long-term goals.
Unlike some accounts that have monthly maintenance fees that slowly drain your account, CDs usually don’t have any fees. This allows you to take full advantage of compound interest to grow your savings over time.
Depending on the bank or credit union, CDs also tend to have lower minimum deposit requirements than money market accounts. With Baton Rouge Telco, for example, you can open a CD with as little as $500, and there are no monthly fees.
A CD is a steady, reliable way to grow your savings. The interest rate is guaranteed and won’t change. You also don't have to constantly monitor the markets to watch for a sudden stock downturn or changes in the economy. This predictability makes it easy to plan for the future.
CDs typically have terms ranging from a few months to several years. Baton Rouge Telco, for example, offers CD terms ranging from three months to five years so you can select the best term for your needs. For example, if you're saving for holiday expenses, a six-month term might be ideal. If you need to save for a down payment on a home, a five-year CD offers a higher rate to maximize your savings over time.
Although CDs have a lot going for them, there are some drawbacks to consider. They aren’t ideal for every situation. Understanding the potential limitations can help you decide whether a CD makes sense for your goals.
Here’s where CDs might not fit your needs:
Unlike a savings account, you can’t withdraw money from a CD whenever you choose. Once you select a term, your funds must remain in the account until the maturity date to earn the full interest and avoid early withdrawal penalties. CDs aren't ideal for emergency savings, for example, or situations where you might need quick access to your funds.
With a CD, the interest you earn is taxable. You must report it on your taxes in the year it’s earned, not when the CD matures. Depending on your income and deductions, this could reduce the size of your tax refund or even result in additional taxes owed.
While CDs provide a guaranteed return, the fixed interest rate may not keep up with rising prices over time. If inflation increases faster than your CD’s rate, the purchasing power of your money decreases.
When your CD reaches maturity, interest rates may be lower than when you first opened the account. If you reinvest at the new lower rate, you’ll earn less.
To help manage this risk, some people use a strategy known as CD laddering, which involves opening multiple CDs with staggered maturity dates. This makes your money more liquid, and it reduces the risk of locking in all of your savings at a low rate.
Are CDs worth it? It depends on your needs and goals.
A CD might be a good option when you want to earn a higher interest rate than a regular savings account and you don’t need to access your money for a while. For example, a five-year CD might make sense when you want to save for a down payment on a home. A two-year CD might help you save enough to cover expenses while you’re earning a college degree.
A CD may not be the best savings option when you need access to your funds. For example, if you need an account for an emergency fund, a savings account is a better option because you can withdraw money as needed without penalty. If you want to grow your retirement savings, a specialized account — like a Traditional or Roth IRA — offers tax benefits that CDs don’t provide.
Opening a CD is fast and easy. With Baton Rouge Telco, you can get started online, by phone, or in person at a local branch.
Here are the steps:
Interest rates often vary between financial institutions, so be sure to compare offers to find the best deal. Credit unions, like Baton Rouge Telco, often have the best rates because they are member-owned nonprofit organizations. They're also known for their personalized service that puts your needs first.
How long do you want to invest your money? Before choosing a term, remember that you won’t be able to access your funds until the maturity date without paying an early withdrawal penalty. However, longer CD terms usually come with higher interest rates, which allows your savings to grow faster.
Transfer money from another account or make a cash deposit at a branch. Once your CD is opened and funded, you’ll receive a confirmation with your account details, interest rate, maturity date, and terms. You’ll receive a reminder as your CD nears maturity, which gives you time to decide whether to withdraw your funds or renew.
CDs offer several advantages over regular savings accounts and other savings options. They provide higher interest rates, guaranteed returns, and no monthly fees. Your funds are also federally insured for up to $250,000. CDs are a low-risk way to save for a car, home, college, and other goals.
Ready to get started? Our CDs offer competitive rates and flexible terms to help you reach your savings goals. Check out our certificate of deposit options today to see how easy it is to grow your money.
Federally insured by NCUA. Your savings federally insured to at least $250,000 and backed by the full faith and credit of the United States Government – National Credit Union Administration (NCUA), a U.S. Government Agency.
