Four Benefits of a Certificate of Deposit (CD)

Perhaps you have a higher risk mix in your investment portfolio or are looking beyond a basic savings account to earn more interest and help your money grow faster. If that's the case, you might want to consider investing in a Certificate of Deposit (CD) to help you reach your long-term savings goals. A certificate of deposit (CD) is a savings account that earns interest on a fixed amount of money for a set period of time. These accounts are usually much more predictable than others and offer a safer option.

Certificates tend to have higher fixed interest rates locked in for the entire term, and dividends are typically paid monthly. In short, these are highly secure, safe options compared to high-risk individual stocks and many other financial assets.

CDs are locked for the designated term, so you will want to ensure you don't need the funds you invest for as long as they are held in the certificate account. You can sometimes withdraw this money early with a minimum penalty: Federal law sets a minimum penalty, but there is no maximum one. The early withdrawal penalty will vary based on the term of the certificate.

Nonetheless, it's probably best to avoid early withdrawal since you don't want to give away any more hard-earned cash than you have to, especially since your goal is to grow your wealth over a more extended period. Because your funds are locked into the certificate’s term, it's in your best interest to establish—or continue building—an emergency fund covering three to twelve months of basic living expenses.

Let’s examine the benefits of a certificate of deposit.

1. Safety and Security

Perhaps you are new to investing and overwhelmed by the myriad of options in the market. If that is the case, CDs are an excellent place to start because they are low-risk savings accounts. However, they are a step above putting your money into a savings account because you typically earn a higher guaranteed return.

Suppose you simply want to keep your money safe and earn a consistent, predictable rate on it over a long period. CDs are the answer in that case: they provide a fixed rate for a set amount of months or years as you build your wealth and invest in additional assets.

If you invest with a credit union, your certificate is insured through National Credit Union Administration (NCUA), while the Federal Deposit Insurance Corporation (FDIC) insures banks. If a financial institution fails, you are guaranteed to get your money back if your investment is less than or equal to $250,000.

2. Flexibility to Match Your Goals

If you are someone who only has a minimal amount to invest or doesn’t want your money locked away for decades, CDs give you the ability to choose between various terms—ranging from months to several years—so that you can simply let it sit and watch it grow. This is great for people who are afraid they will spend their hard-earned cash and want to store it safely while also protecting it.

Additionally, this investment has a relatively low barrier of entry, so you do not have to invest your entire life savings—unless you want to. Instead, you can simply set aside a small portion of cash to balance out your riskier investments.

3. Diversification to Reduce Volatility

The stock market is a common route to wealth-building for many, but the nearly constant swings are enough to make almost anyone’s stomach churn. Many people can lose significant sums of money daily because they have risked a lot. Though this can come with high rewards in many cases and offers an average annualized return, CDs are one of the safest investments. They provide you with relatively predictable income and greater peace of mind, meaning you will not have to deal with nearly as much volatility as you would in the stock market.

For some, this provides a reasonable way to diversify your portfolio and balance out your riskier investments with a much safer, more secure option. For others who are risk-averse and want to avoid losing money, even if that comes with a lower return in some cases, a CD is also an excellent option.

It is no secret that the stock market is extremely volatile, which is why CDs are enormously beneficial: CDs do not fluctuate in value. For example, if you have pursued a career path with unpredictable income, you can count on a CD to tide you over during difficult times and secure your financial future. These assets are also easy to continuously invest in if after the term you've chosen has passed.

4. Straightforward Investing

The drawback with most investing is that it's wildly unpredictable, so it's tough to gauge how much you will earn as a return and how long that will take. Unfortunately, this is simply part of investing.

However, CDs stand out in this regard. They are relatively straightforward; you can choose a timeline that suits you, and you can count on a monthly dividend and a fixed rate. This safe, predictable investment is steady despite all the chaos of wealth-building and market swings. Other investments go up and down nearly all the time. CDs are generally straightforward.

Boost Your Savings with a CD

Investing and saving is essential if you want to build wealth and make your money work for you. With a solid plan and diligence, you can build your savings. While investing in multiple assets in the stock market is an option, it’s important to remember that CDs are a safe, secure counterbalance for your portfolio.