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Pros and Cons of Certificates of Deposit (CDs)

Pros and Cons of Certificates of Deposit (CDs)

Jenius Bank Team8/29/2023 • Updated 8/21/2024
A couple sitting on a couch discussing CD options.
CDs offer several benefits and may be a great addition to your saving strategy.Certificates of deposit (CDs) are a type of savings product that could help you build your wealth over time. These accounts work by earning interest on the money you deposit. Typically, the rate won’t change and you’re expected to leave the money in the account for a set time if you want to see the full potential return.1 Learn more about how CDs work in part-one of our series.Incorporating these accounts into your savings strategy could be a great choice, but there are a few pros and cons to be aware of before you open an account.

Key Takeaways

  • CDs are a type of savings product that pays interest on deposited funds over a set term.
  • CD rates are often higher than other savings accounts and are lower risk than other investment types.
  • You may have to pay a penalty for withdrawing funds prior to the end of your CD’s term.

Pros of Using CDs to Build Your Savings

CDs have been around for decades and when rates are higher, people tend to incorporate these accounts into their savings strategies more often. Let’s take a closer look at some of the benefits of using certificates of deposit as a savings tool.

The Accounts Are Secure

CD accounts provide a secure place to store your savings. When you open an account with a chartered bank or credit union, your funds are protected by either FDIC insurance or NCUA insurance. These policies protect up to $250,000 per depositor, per account type, per institution if the bank or credit union goes under.2

Earn Predictable Returns

Most investment accounts earn variable returns that make it difficult to predict your accounts’ growth over time. But most CDs let you lock in an Annual Percentage Yield (APY) for your account’s term. That fixed rate means you have more predictable earnings on the money you deposit into the account. That said, some CDs do offer variable rates, which could make it harder to calculate your potential earnings over time. Be sure to check the rate type before you open an account.3

CDs May Offer Higher Rates Than Other Savings Products

Since CDs typically require you to leave your money in the account for a set time, they tend to offer higher rates than other deposit products, like savings accounts or money market accounts. And typically, the longer the account term, the higher the rate since the bank knows your money is going to be available to them for more time. Be sure to do your research and compare the rates and terms of each CD you’re interested in before making your deposit.4 They can vary from bank to bank!

The Cons of Using CDs to Build Your Savings

Though CDs could be an effective way to increase your savings, they’re not perfect. Here are some of the key downsides to be aware of before opening an account.

Funds Are Typically Stuck Until the CD Matures

CDs typically require you to leave your money in the account until the end of the account’s term. If you try to withdraw funds before the account matures or reaches the end of its term, you may have to pay a withdrawal penalty. Additionally, the interest you receive is likely to be less than what you could’ve earned after the full term.5

Early Withdrawal Penalties May Be Significant

Each bank is permitted to set their own early withdrawal penalties, and they may be more expensive than you think. It’s common for a bank to penalize an early withdrawal with one or more month’s interest. In these cases, the exact penalty, or earnings sacrificed, usually depends on the CD term.6 CDs with longer terms typically come with higher penalty fees. Speak with your bank or credit union to learn more about the withdrawal penalties you may have to pay and any other terms your financial institution has regarding early withdrawals.

You May Earn Lower Returns in the Long Run

Since most standard CDs involve a locked rate, your maximum earnings are likely capped. If the market rate is on the rise, locking in a rate too early could cause you to lose out on those higher rates in the future, impacting how your overall portfolio could benefit. In addition, locking up all your investment funds in CDs may not be the best way to optimize your longer-term savings since typically CDs earn lower returns than other investments like stocks, bonds, and mutual funds.7 It’s best to consult with a financial advisor for your long-term savings plan. They’ll be able to help you decide if opening a CD could help you reach your goals or if you’d be better served by investing your money in higher-return products.

Final Thoughts

At the end of the day, choosing to add CDs to your saving strategy is similar to choosing to open any new account. There are pros and cons to consider, along with evaluating a fit with your specific financial goals.It’s also important to keep in mind that CDs are just one option when it comes to your savings. Leveraging a typical savings accounts could offer you the ability to grow your funds over time while also keeping them accessible in case of emergencies. Learn more about Jenius Bank’s high-yield savings accounts and see if saving with market-leading rates could help you meet your goals even faster.
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