19 Jun 6 Signs You Should Invest in a CD
Certificates of Deposit (CDs) are a safe, predictable investment option, and they generally offer higher interest rates than conventional savings accounts. Trying to decide if a CD is right for your savings goals? Here are six signs you should consider opening a CD account.
1. You Are Comfortable Keeping the Money in the CD
Traditionally, CDs have a maturity date, and if you withdraw the funds before that date, you face fees or penalties that can eliminate the interest you earn or even cut into the value of the CD. When investing in a CD, make sure that you understand when the CD matures and any penalties associated with early withdrawal. Then, make sure you are comfortable having your funds tied up for that amount of time.
Note that although they are less common, you can find CDs that have no penalties for early withdrawal, but in exchange, they may have slightly lower interest rates.
2. You Have a Long-Term Savings Goal
You can actually choose CDs with maturity dates that work with your savings goals. For instance, if you’re trying to save money for your child to go to college, you may want to buy CDs that mature when your child graduates from high school.
3. You Have a Rainy Day Fund
Ideally, before tying up money in any investments, you should make sure that you have cash savings on hand. Financial experts generally recommend having three to six months of living expenses in a savings account, a money market account, or any other type of account you can liquidate quickly in case of job loss or other emergencies.
If you don’t have a rainy day fund, you may want to set that up before you start investing in CDs.
4. You’re Making 401(k) Contributions Up to the Employer Match
When choosing investments, you should almost always look for options with the highest rates of return. If your employer offers a 401(k) with an employer match, you may want to consider that option before investing in a CD. With an employer match, you receive a 100% rate of return immediately.
To explain, imagine your employer matches the first 2% of the income you contribute to your 401(k). You earn $1,000 a week, and you deposit 2% or $20 into your 401(k). When your employer matches that amount, you have $40. You have doubled your money even before the investment has a chance to grow in the 401(k) fund.
Keep in mind these numbers reflect what happens with a 100% match. If your employer offers a 50% match, you receive a 50% rate of return.
5. You Want Predictability
On top of thinking of rate of return, you also need to think about predictability with your investments. CDs are completely predictable. You know exactly how much return you get in interest and when you receive that amount.
In contrast, other investments all have different levels of predictability. If you invest in a business or buy a home, you don’t know for certain if the business is going to be lucrative or home values are going to increase. If you’re trying to balance risky and predictable investments in your portfolio, CDs are a great way to add some stability to the mix.
6. You’ve Found an FDIC Insured Bank
You can get CDs from a number of places, but ideally, you should choose a bank insured by the Federal Deposit Insurance Corporation (FDIC).
The FDIC insures deposits at these banks dollar for dollar up to at least $250,000. As a result, if you buy a CD at an insured bank, you know your money is safe, even if the bank goes out of business.