The Pros & Cons of Purchasing Certificates of Deposit in Today’s Economy

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Putting your money into a CD instead of keeping it in a savings account certainly has its pros and cons: On one hand, there is a small return.

On the other, you generally have to hold CDs for years on end and you only receive minimal interest.

That being said, it is arguably a better investment than keeping your hard-earned cash in a savings account, and it is much safer than betting on an Apple stock that may go up or down on any given day so, although you probably won’t gain a lot of money in a short amount of time, you will also not lose any money.

AGE

If you are young — in your 20s for example — investing in CDs could be extremely beneficial, because you will earn more money over time.

On the other hand, if you are in your thirties or forties, it could potentially be a less lucrative investment, considering that you cannot take advantage of compound interest the way you could in your twenties.

That being said, a CD could still be a good investment if you have a sizeable amount of your income.

NETWORK

If you have a large network that can steer you in the right direction, this could be beneficial.

SAVINGS GOALS

If you want to earn a large amount of money over a short period of time, then investing in a CD is certainly not the best route to take: You’d probably be better off taking a high-risk, high-reward approach and investing in the stock market!

That being said, if you are looking for a safe place to store your money and you don’t want to lose any of your earnings, CDs are an excellent option.

In short, they are the perfect place to park your funds, and earn a minimal amount of interest in the process.

3 PROS

Investing in a Certificate of Deposit, or CD, is an excellent decision if you’re looking for something safe that offers a slightly higher return than simply keeping your cash in a savings account.

1. YOU WILL NOT LOSE MONEY

The great thing about CDs is that you will not lose any money — not even a cent! — so you can definitely have peace of mind knowing that, although the reward is minimal, the risk is also extremely low.

2. YOU’LL RECEIVE HIGHER RETURNS THAN YOU WOULD BY SIMPLY KEEPING YOUR CASH IN A SAVINGS ACCOUNT

While a CD is not the most profitable investment in the world, it is probably one of the safest, and you will be receiving some amount of interest on your investment every year, so that could certainly serve you well in the future, particularly if you are young and you’re investing in retirement.

That minimal amount of interest can certainly add up over time!

3. THE RETURNS ARE PREDICTABLE

While the return rates are generally quite small, these can add up over time, and they are reliable. For long-term investors who are considering something that will result in more money when they are older, this is potentially a good investment.

“According to Bankrate’s most recent national survey of banks and thrifts, the average rate is 0.22 percent for a one-year CD, 0.24 percent for a one-year jumbo CD, 0.39 percent for a five-year CD and 0.40 percent for a five-year jumbo CD.”

— Matthew Goldberg

CDs have predictable return rates that are ideal for the investor who has a long-term time frame in mind.

3 CONS

The cons of CDs is that, although they are inherently safe. They are not exactly best for folks who are looking to earn a lot of money fast and build their wealth in a shorter period of time.

1. THE RETURNS ARE MINIMAL

Most returns are less than 1%, so these will accumulate at a snail’s pace.

If you are looking for a higher return though, you will almost always have to make a riskier investment.

2. THIS IS A LOW-RISK, LOW-REWARD OPTION

CDs are great in that they are low risk.

The downside is that your interest won’t compound as fast, and you will only receive a very meager amount of money each year unless you have a sizeable amount to invest.

Of course, if you have hundreds of thousands of dollars on your hands and you’re young, this could be something to consider, but you’ll probably get much higher returns by investing in the stock market!

3. THE INFLATION RISK

CDs do not keep up with inflation, making it difficult when interest rates rise.

“CD rates tend to lag rising inflation on the way up and drop more quickly than inflation on the way down. Because of that, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.”

— Amanda Dixon

This is probably the biggest downside of investing in CDs. In fact, it makes them a slightly risky investment because your money will lose its value over time.

That is not great, but, if you diversify your investments, it might still be a good idea to invest in a few CDs: You never want to be solely reliant on one stream of income after all, whether that’s from a CD, other investments, or active income.

If you are looking for an investment that is extremely safe and you are a young adult who wants to plan for retirement, a CD might be exactly what you need.

On the other hand, if you are a bit older and you want to grow your net worth swiftly, this investment is probably not the best option.

Either way, it never hurts to diversify your investments and have something safe. That being said, you will want to remember that CDs do not keep up with inflation, so it’s probably in your best interest to invest in something else that does!

After all, you can never have too many income streams!

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