Investing in CDs: Pros and Cons

The safety and predictability of certificates of deposit make them appealing, especially in times of economic instability, even if they aren’t the most exciting investments. Investing in CD

Many Americans are prioritizing saving money and sticking to a strict budget in light of persistently high inflation and the possibility of a recession. Investing in CDs: Pros and Cons

CDs aren’t a great way to get rich quick, but they can be a good option if you need a safe location to put money for a set amount of time and value security in the form of a fixed rate of return.

Investing in CDs has several benefits.


To the extent of $250,000 per depositor, per insured bank, per ownership type, the U.S. government guarantees certificates of deposit issued by federally insured banks and credit unions.

Certified financial planner Buz Livingston of Santa Rosa Beach, Florida’s Livingston Financial Planning says, “The return of your money is more important than the return on your money.”

No one has ever lost money investing in CDs backed by the Federal Deposit Insurance Corp., a government entity that insures bank deposits. Your funds, up to the insured amount, are protected in the event that a financial institution goes out of business.

Superior returns compared to bank deposits

CDs are more valuable to banks than savings deposits since customers cannot withdraw their money at any time, as is the case with savings accounts. In exchange for depositing their money with the bank for a certain period of time, CD holders often receive a greater yield from the bank.

With the Federal Reserve increasing interest rates, certificates of deposit have become a more attractive investment option. Locking in a competitive rate with a CD could be useful because the best 1-year CDs pay more than the best savings accounts.

Guaranteed and stable profits

Investors can expect a fixed return on their CDs at a certain date, which is not the case with other bank accounts or investments.

Your CD interest rate will not change for the duration of the CD, even if interest rates nationally drop dramatically. Your financial strategy can be benchmarked by projecting your future profits to maturity with a fixed rate of return.

Wide selection of terms

Thousands of banks and credit unions offer CDs with a wide range of maturities and returns. CDs have maturities that vary widely, from one month to ten years. Investors might discover a CD that meets their demands from among these many possibilities.

Investors who put their money into certificates of deposit (CDs) now, particularly through a CD ladder, can take advantage of higher interest rates and higher returns.

Several different kinds of accounts to choose from

The possibilities available to CD investors are diverse. Several financial organizations provide no-penalty (or liquid) CDs for savers who want a competitive interest rate without early withdrawal penalties.

Step-up CDs, bump-up CDs, jumbo CDs, add-on CDs, and CDs that allow more than one deposit are some of the other types of certificates of deposit you could encounter. If you need access to funds quickly and a conventional CD isn’t a suitable fit, you may have other options.

Disadvantages of investing in CD

A lack of available funds

The lack of liquidity in a certificate of deposit (CD) is a fundamental negative for account holders. They may lose interest and even their initial investment if they withdraw money too soon and are penalized.

“Liquidity is typical of utmost importance during times of uncertainty. According to Atlanta’s East Paces Group principal and co-founder Alex Reffett, “This liquidity might be used for buying opportunities in a distressed market, or it could even be useful for financing expenditure demands so that other long-term investments do not need to be sold.”

Consumers should consider CD returns and terms in light of the possibility of needing access to the funds versus alternative investment options before committing to a CD.

If you want to give yourself more leeway as a CD investor, one strategy is to set up a CD ladder consisting of CDs with varying maturities.

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Inflation risk

When inflation rises, CD rates tend to fall more slowly than inflation, and vice versa when inflation falls. CDs risk losing purchasing value over time as inflation outpaces interest yields.

Michael Foguth, founder of Brighton, Michigan’s Foguth Financial Group, warns that locking up money in a fixed-rate investment makes it vulnerable to inflation.

Consumers should save rather than borrow with rising rates, but excessive inflation should be considered.

The returns are relatively low.

CDs often earn less than equities and exchange-traded funds, but they yield more than other, more liquid bank accounts (ETFs). There is an opportunity cost associated with this situation.

The Noel Taylor Agency’s founder and CEO, Lamar Brabham, says, “If something comes along that presents a true potential to enhance your money and your money is locked up in a CD, then you lose.”
Safety is interrelated.

Looking back 30 years, we can see that interest rates on CDs have fluctuated. Five-year certificates of deposit offered returns of over 11 percent in the mid-1980s. Recently, however, there has been a general declining trend, with rates reaching historic lows during the 2009 COVID-19 epidemic. However, starting in June 2021, CD rates have been gradually increasing along with the economy’s recovery.

Investors should compare CD rates before committing to one institution. As of December 7, 2022, Bankrate’s national survey of banks and thrifts showed that five-year CDs averaged 1.08 percent. But, several five-year CDs are available that pay almost 5% APY.

The Danger of Reinvesting

If an investor reinvests at a lower APY after locking in a CD rate, returns may have dropped by the time the CD expires. Using a shorter-term CD ladder to take advantage of higher rewards when CDs mature reduces reinvestment risk.


Taxes on CD interest might also affect returns.
The same problem exists with financial savings.

Knowing how taxes can affect your finances allows you to make the necessary preparations in advance.

In conclusion

If you want to invest your money safely, compare certificates of deposit (CDs) and check which banks provide the best rates.

Don’t let worries about the state of the U.S. economy prevent you from purchasing certificates of deposit. Consider your financial goals and time frame when choosing a CD. .Investing in CDs: Pros and Cons

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