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Building a secure financial future means making smart investments now. When building your financial portfolio, guarantee its diversity and stability with Certificates of Deposit (CDs). These interest-bearing savings accounts give you access to diverse investments and growing wealth. Here is a look at 7 of the reasons that CDs make a good investment.
Safety and Security
Investments often carry an element of risk, the chance that you could lose the wealth you have built. Not when you purchase CDs. One of the biggest advantages of Certificates of Deposits is the security they provide. Federal insurance from the Federal Deposit Insurance Corporation (FDIC) protects up to $250,000 per depositor, for each insured bank where you have your CDS. Even in the worst case scenario, if your bank fails, you will still receive your insured amount of money. In volatile economic times, this type of stability is both appealing and necessary if you are to build a strong financial future.
Predictable Returns
Most investment options deliver variable returns. Some years, you lose money. Other years, you make money. And, even when you make money, the amount you earn depends upon a lot of factors outside your control. You can never be sure what interest rates will be available to you over time. CDs, however, offer fixed interest rates. That means that you earn the same percentage on your CD, year after year after year, regardless of whether the interest rates in the market rise or fall. As a result, this investment option delivers predictable, reliable returns you can plan on.
Flexible Terms
Certificates of Deposit make it easy to align your investment with your financial goals by offering variable term lengths. For example, you can take a CD out for just a few months, or you can take one out for several years. Take out a short-term CD if you need your money quickly. Invest in a long-term CD if you want to earn higher rates that will set you up with greater savings for the long-term. Because you have a choice, you can use this form of investment for many different needs.
Higher Interest Rates
You can tuck money away in your savings account, but a Certificate of Deposit doesn’t just protect your money. It grows your money. With interest rates that can be above 5 percent, they far outmatch any interest you earn from a standard savings account. In addition, they often offer higher interest rates than even high-yield savings account, with predictable instead of variable rates to make the money you earn predictable. Want the highest possible rate? Choose a long-term CD, since these usually offer the highest rates and the most money for your investment.
Laddering Options
A CD can make a good investment because it gives you the option of “laddering” your deposits in order to both maintain access to liquid cash and help you take advantage of higher interest rates. It works like this: You divide your investment among several CDS with different term lengths. As each CD matures, you take the money and put it into a longer-term CD. As a result, you regularly have access to your funds (When you withdraw from the shorter-term CD), while also allowing you to grow your money through long-term, high interest rates.
Ease of Entry
Unlike many other investments, you do not have to have access to thousands of dollars just to open an account. Most CDs have a low minimum deposit requirement. Usually, you will need to have only $500-$1,000 per CD. This makes them the perfect avenue for beginning investments, or for securing some of your finances in a stable location while you put the rest of your investments into riskier avenues.
Portfolio Diversification
Finally, CDs help you to diversify your portfolio. This means spreading your investments across many different channels in order to reduce the risk of losing your money if one of your assets experiences a downturn. A secure CD investment can help you balance higher-risk investments and give you a predictable return and security on which to build your wealth.
Practical Tips for Choosing a CD
Because there are so many options when it comes to Certificates of Deposit, you need to take time to evaluate your options before committing to a CD. Here are some practical steps you can take to zero in on the right CD for you.
Set Financial Goals
The first step in choosing a Certificate of Deposit is to set your financial goals and decide when you want access to your money. Short-term CDs may work best if you need your money within a year or two. Long-term CDs, on the other hand, allow you to earn a higher interest rate and are ideal for circumstances where you do not need access to the money right away. Aligning the CD with your financial goals enables you to access your money when you need it.
Compare Interest Rates
Not every CD has the same interest rate. You may get a better interest rate from one CD than another, or even from one bank over another. Shop around to find the financial institution and the CD type that offer you the best possible interest rate for the term length you require.
Understand the Terms and Conditions
Before choosing a CD, make sure you understand the terms of the product, including any penalties, the term length, and interest rates. You may even be able to find a CD that does not impose a penalty for early withdrawal. Understanding your CD will enable you to avoid unexpected costs and earn the highest possible return on your investment.
Potential Risk and a Common Misconception
While CDs are a very low risk way to grow your money, they do carry some risk of money loss, and there is one common misconception you should be aware of before committing to this specialized savings vehicle.
Risk of Early Withdrawal Penalties
CDs do have some downsides, the primary one being the penalty you receive for withdrawing funds before the CD matures. You could end up paying all of your earned interest toward the penalty, meaning you would not make any money off your CD. Make sure you choose a CD with a term that you are sure you can commit to.
Misconception: CDs Offer the Best Returns
CDs are a very stable investment vehicle and offer a stable interest rate that often exceeds those of other savings accounts. However, they do not always offer the highest returns possible. Traditional investments, money market accounts, or other investment vehicles may offer higher interest rates – As long as you are willing to assume the higher risk that comes along with them. Make sure you are satisfied with your interest rate before committing to the CD, and make sure your diversified portfolio includes both CDs and higher-risk investments.
Long-Term Benefits of CDs in an Investment Strategy
If you want to build wealth through an effective investment strategy, CDs should be part of your approach. Here are the long-term benefits of using CDs in your investment strategy.
Stable, Predictable Growth
The fixed interest rate of CDs means you always know exactly how much you will earn from your CD. In a volatile economy, this stability can be a valuable aspect of your investment and protect you against losing money due to market fluctuations.
Compounding Interest
If you need immediate access to your money, CDs give you the opportunity to reinvest the interest and grow your investment return. Compounding your interest can help your CD to grow quickly and maximize your return on your investment.
Diversification
As mentioned above, CDs can diversify your portfolio, creating a more stable investment plan over time. Use CDs to balance out more aggressive investments and lower your portfolio’s overall risk.
CDs can be a good investment on any budget by providing a low-risk, secure, flexible way to grow your wealth. At Bank of South Texas, we offer a variety of high-return CDs to fit your term needs and budget. Let us help you make a stable investment part of your wealth growth strategy.