Does your bank offer CD’s?  What are they and should you buy them?

CD’s, also known as Certificates of Deposit are usually offered by banks and credit unions.  They’re savings options that are pretty low risk with a fixed interest rate.  What’s nice is that you know exactly how much your investment will earn.  And, they offer higher interest rates than standard savings and/or money market accounts.

On the flip side, your money is tied up.  If you withdraw your money early, you most likely will incur a penalty regulated by the terms of the CD.  Additionally, if inflation increases more than your CD rate, your funds will lose some buying power.  You may also lose out on better investments such as stocks, bonds, or high- yield savings accounts.  Additionally, if the rates go up after you’ve committed to your CD, you’re stuck with your lower rate.

CD’s are good if you want a secure and particular rate of interest.  You should also only use money that you don’t need during the lifespan of that particular CD.  Remember, your money is locked up for the term of the CD.  They’re good for diversification and their interest rates are relatively high compared to regular savings accounts.  However, if you need your funds to remain liquid, this is not the investment for you.  Additionally, CD’s aren’t a growth investment.  For growth, use stocks, or other longer-term investments that don’t necessarily lock your money up.  

Moral of the story:

Personally, I don’t like any type of investment that locks your money up.  As a result, I don’t like CD’s.  I find I get a much better return by investing in the market.  For example, right now, there’s a bank offering 4.1% for a 14-month CD with a minimum of a $500 deposit.  While that interest rate sounds good, you’ve locked your money up for over a year.  My money in my money market is earning 3.85% and it’s totally liquid.  The biggest difference is that my money market rate will probably go down during the next 14 months.  But, I’d rather have my funds liquid over locked up.