A certificate of deposit (CD) is a type of time deposit account that pays interest. It is a popular saving tool among investors who do not want to take on the risk of losing capital but wish to earn returns.
Is a certificate of deposit a good investment?
Whether a certificate of deposit is a good investment depends on your financial goals and personal situation. Investors tend to seek three main benefits from their investments, according to David Frederick, Senior Vice President of Wealth Management at First Bank, who stated in an email to The Balance. These are liquidity (accessibility), no risk, and a good return. However, no investment provides all three benefits.
What is the return rate on certificates of deposit?
CD rates tend to increase with longer terms. Generally, six-month CDs or longer tend to have more competitive rates compared to savings account interest rates.
Alternatives to certificates of deposit
When considering alternatives to certificates of deposit, think about assets that offer comparative benefits in terms of low risk and stable returns, such as bonds and dividend stocks. Also, consider how you can use your money to achieve a roughly guaranteed return with little or no risk, according to Frederick.
Bonds
A bond is a type of debt security that pays fixed interest over a specified period. In return, you are lending money to the issuer, such as a government or corporation, which will also make regular payments on that debt.
Treasury Inflation-Protected Securities (TIPS)
Like CDs, bonds may not be ideal when inflation is rising, especially if the yield does not keep pace with the rate of price increases.
Dividend stocks
If you are comfortable taking on more risk, you may want to consider dividend stocks. Many large companies share their profits with shareholders in the form of dividends, which are typically paid out on a set schedule, although companies can issue them at any time.
Paying off high-interest debt
Putting your excess cash towards paying off debt can improve your financial situation just as much as investing in assets for profit. This is because you can save significant amounts in interest.
Storing savings in high-yield bank accounts
A high-yield savings account can be a safe place to store your emergency fund or other savings while earning interest. Like CDs, savings accounts typically have FDIC protection up to $250,000 per account.
Purchasing life insurance
Life insurance is primarily considered a tool to financially protect loved ones in the event of your death. However, the insurance policy has a cash value that you can access during your lifetime. The cash value earns a portion of the policy interest based on a rate set by the insurer or the market, depending on the type of policy.
Conclusion
If you are looking for a safe place to store your savings and earn a small amount of interest, a certificate of deposit may provide what you need. However, you should consider alternatives that may offer greater liquidity or better rates and may be more suitable for your needs, depending on your financial goals.
You can work with a financial advisor to create a wealth plan suited to your situation, which may include certificates of deposit or other assets with similar benefits.
Frequently Asked Questions
Why is a certificate of deposit considered a very safe investment?
A certificate of deposit is considered a safe investment because your principal balance is securely protected by the bank as well as by FDIC insurance up to $250,000. Essentially, you are guaranteed not to lose any money (provided you adhere to the terms of your account), while earning interest.
What
What is the minimum balance for a certificate of deposit?
The minimum deposit required to open a certificate of deposit depends on the bank and the specific product. Some certificates of deposit require a low deposit, while others require several thousand dollars. For example, large certificates of deposit have a balance of $100,000 or more. In some cases, you can earn a higher interest rate by depositing a larger amount.
Source: https://www.thebalancemoney.com/6-cd-alternatives-to-consider-5222629
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