Certificate of Deposit: Advantages and Disadvantages
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.
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. You’ll maximize your savings and earn more with competitive interest rates that go up as you choose longer terms.
This is a great option if you’re saving for a specific goal or timeline. Before you decide if it’s the right option for you, we’ll cover some certificate of deposit advantages and disadvantages.
What Is a Certificate of Deposit?
A certificate of deposit (CD) is a type of savings account that holds your deposited funds for a set amount of time. As your chosen credit union holding the funds, we pay you interest on the total balance. Once the term ends, you’ll receive the amount you originally deposited in the account, plus accrued interest.
If you take money out of your CD before it matures, you typically have to pay a penalty. CDs tend to offer higher interest rates than savings accounts because of the restrictions placed on accessing money earlier than the end term.
How a Certificate of Deposit Works
At Baton Rouge Telco Federal Credit Union, we offer CD terms from three months up to five years and longer. This will help you choose how much you want to deposit and for how long.
CDs are an elevated type of savings account, meaning you’re able to earn dividends on your deposit as well as the interest earned. These dividends are paid monthly and can easily be transferred to another savings account if you choose.
Think of this like extra credit — in exchange for leaving your money untouched, we’ll pay you more!
Certificate of Deposit Advantages
CDs offer a range of benefits that make them a good choice for earning interest on extra money!
Safety: Rewards Without Risk
CDs are a great option if you want to avoid risking your money in the stock market, but still want to grow your wealth. You’ll see most certificates are federally insured up to $250,000, taking much of the risk out of your investment.
When you withdraw your deposit from your CD, expect to receive your deposit and the interest you’ve earned (unless you make an early withdrawal). To increase flexibility, you might want to consider a Certificate Ladder where you stagger your certificates with different maturity dates and terms.
With this strategy, you’ll have more options to access your deposited savings at different periods of time and can still enjoy the advantages of a CD.
Higher Interest Rates Than Regular Savings
CDs tend to offer higher rates than standard savings account options. Another advantage is that CD rates are fixed where rates for checking or savings accounts can be lowered at any time.
This means investing in a CD gives you a predictable return in a specific timeframe. Because CD interest rates are locked, you can work out exactly how much money you’ll earn by the end of your term.
There isn’t any risk of interest rates lowering if market rates change. The longer you set your term, the higher your interest rate and the more you can save!
No Fees
Our CDs require a minimum opening deposit of $500. After that, you’ll owe nothing toward additional or ongoing fees. No monthly fees mean your invested deposit can grow without penalty.
You’ll have guaranteed savings to achieve your future goals, like a downpayment on a car or home, or for the special things in life like vacations and weddings.
Certificate of Deposit Disadvantages
CDs are a great start to long term savings, but they do come with some drawbacks. Before opening an account, you want to have a plan in place so you won’t have to make an early withdrawal.
Limited Access
A CD is not a savings account, meaning you can’t take out money whenever you need it. Once you’ve decided on a term length, you have to leave your funds untouched until the term end or maturity date.
Early withdrawals can mean you lose some or all interest earned, plus some of your deposit, depending on the terms of the CD. This means you should consider another source of funds to turn to for emergency spending.
Taxes
One of the bigger disadvantages of certificates of deposits is they’re subject to taxes. Any interest earned must be claimed in the year it was earned and not just the year when your CD terms. Depending on your income and deductions, this could lower your tax refund received. You might also end up owing additional taxes if you underpaid for the year.
Inflation
Keep in mind how the current state of the economy can affect your returns! Certificate rates could be lower than the rate of inflation. This means your money might lose its purchasing power over time if the interest you earn is less than the rate of inflation.
Grow Your Savings With Baton Rouge Telco!
We’ve now outlined the main certificate of deposit advantages and disadvantages to help you decide if this type of account is right for you.
You can easily open a CD with us by applying online, making your initial deposit, and choosing a term. Click the link below to learn more!
