A certificate of deposit (CD) is a financial product offered by banks and credit unions that allows individuals to deposit money for a fixed period of time in exchange for a higher interest rate. CDs are considered a low-risk investment because they are FDIC-insured or NCUA-insured, meaning that your money is protected in the event that the bank or credit union fails. One of the main concerns with a CD investment is that there might come a time when you will be needing the money that you have invested. In such a case, you will have to breach the contract and have to pay early withdrawal penalties or fees.
Fortunately, there are banks that offer no or low-penalty CDs so that customers will have options. One of the market leaders in offering such products is CIT Bank. If you’re interested, you can look up CIT bank CD rates for more details. In this article, we are going to talk about the benefits and drawbacks of a CD investment.
Higher Interest Rate
One of the main benefits of a CD is that it offers a higher interest rate than a traditional savings account. The interest rate is fixed for the term of the CD, which can range from a few months to several years. The longer the term of the CD, the higher the interest rate typically is. This means you can earn more on your money with a CD than with a savings account. For example, if you deposit $10,000 into a CD with a 3% interest rate for a one-year term, you will earn $300 in interest at the end of the year.
CDs also offer the advantage of predictability. Because the interest rate is fixed for the term of the CD, you know exactly how much interest you will earn on your money. This can be helpful for those who are planning for a specific financial goal, such as saving for a down payment on a house or saving for retirement. You can calculate exactly how much money you will have at the end of the CD term based on the interest rate and the amount you deposit.
There are a few drawbacks to consider when it comes to CDs. One is that you are required to leave your money on deposit for the term of the CD, which can range from a few months to several years. If you need to access your money before the CD matures, you may be subject to an early withdrawal penalty. This can be a drawback for those who need access to their money on short notice or may face unexpected expenses during the term of the CD.
Prone to Inflation
Another drawback is that CDs may not keep up with inflation over the long term. As the general level of prices for goods and services increases, inflation occurs, and purchasing power may decrease. Central banks attempt to limit inflation and follow an inflation target in an effort to keep the economy running smoothly. If the interest rate on your CD does not keep up with the rate of inflation, the purchasing power of your money may decline over time. For example, if the rate of inflation is 2% and the interest rate on your CD is 1%, the purchasing power of your money will actually decrease over time because the value of the money you have saved will not increase as fast as the cost of goods and services.
Despite these drawbacks, CDs can be a good choice for those who are looking for a low-risk investment with a higher interest rate than a traditional savings account. It is important to shop around and compare CD rates from different banks and credit unions before choosing a CD. You should also consider the term of the CD, as well as any fees or penalties that may be associated with the CD. By carefully considering these factors, you can choose a CD that meets your financial needs and helps you reach your financial goals.