Reasons to invest in a bank certificate of deposit (CD) include safety, prudence, and self-knowledge. These instruments yield much less than some investments, but more than an ordinary saving account. The return is guaranteed too, a rarity in the investment world.
A certificate of deposit is one prudent way to set a certain amount of money aside for a definite term. It will not grow much, in fact it may shrink due to inflation, but it will always be there. Finally, money in a CD can assure savers that they will have some money when they want it, whether for the holidays, tuition, or tax time, because the penalty will discourage them from withdrawing it and frittering it away.
Safety
The Federal Deposit Insurance Corporation insures bank CDs and the National Credit Union Share Insurance Fund insures credit union CDs. Both the FDIC and the NCUSIF are backed by the full faith and credit of the United States government. However, make sure your account totals less than the maximum amount these insurance funds cover.
Assuming that your holdings are under the insurance limit, the money you put away in a CD is safe, and you will be paid your interest in any conceivable circumstance. You are giving up the possibility of higher returns in exchange for safety.
Prudence
Certificates of Deposits have a place in a prudent, diversified portfolio in spite of their low returns. If you have some relatively risky investments, you might want to balance them with conservative CDs. Then, if a flashy IPO stock costs you some money, you’ll still have the funds you locked away in CDs.
The prudent principle of diversification suggests that invests do not put all their eggs in one basket, no matter how attractive it may be. A few CDs will lower the overall return of a portfolio slightly, but they will lower its risk too.
Self knowledge
Some of the most nearly insolvent people have the most trendy toys. If you have a problem resisting new gadgets, new restaurants, or new clothes, let a CD protect you from yourself.
With your bank or credit union’s help, stash some money in a CD that will come due just before you need it. You can set CDs to almost any term, though usually longer terms will pay more. Then, when the tax man calls, you can answer without taking a cash advance on your credit card.
Certificates of Deposit do not lock up your money forever. In a dire emergency, you can withdraw it—after all, it’s your money. However, the interest penalties will encourage you to keep the money safe and earning for you, so it will be ready when you need it.