3 Benefits of Putting Your Money in CDs

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Banks typically pay higher rates for certificates of deposit (CDs). Learn other benefits of putting your money in a CD.

Keypoints

• Certificates of deposit (CDs) are considered to be one of the safest savings options.
• CDs can offer higher rates than saving accounts and give more predictable growth than the stock market.

With inflation at an all-time high and Russia’s invasion of Ukraine, the stock market has been quite volatile. Savings accounts are on average only returning 0.06%. Those looking for a safe investment with a higher return can consider certificates of deposit (CDs). A 2-year CD will return 0.18%, which is three times more than the average savings account.

A CD is a savings account that holds a lump-sum of money for a fixed period of time. The issuing bank will pay interest based on the term of the CD. Terms usually range from 1-month to 5-years. After the term ends, the bank will return the money originally invested plus any interest. Here are three benefits of putting your money in CDs, given today’s volatile environment.

CDs can be safe

Certificates of deposit are considered to be one of the safest savings options. A CD bought through a federally insured bank is insured up to $250,000. As long as you purchase your CD account through an FDIC-insured bank or a NCUA credit union, you’re covered in case the bank goes out of business.

But it’s important to understand that the $250,000 insurance cap covers all accounts in your name at the same bank, not each of your CDs or accounts. If you have more than $250,000 in one bank, it may be a good idea to spread the funds across different banks. It is also a good idea to shop around to find the best CD rates.

CDs can offer higher returns

In exchange for keeping your funds locked up in a CD for a certain period of time, the bank will offer a higher interest rate than a savings account. Typically, the longer the CD term, the higher the interest rate you earn.

Some banks, however, offer promotional CDs that have higher rates with shorter terms. As of March 4, Pentagon Federal Credit Union is offering a 2-year term CD for 1.35%, which is 7.5 times the national average.

The CD interest rate also depends on the current interest rate environment. With the Fed looking to raise interest rates in the next several months, banks may bump up their CD rates as well.

CDs can offer predictable returns

A CD’s interest rate is set for the entire term. So it’s simple to determine how much interest you will receive. Unlike the stock market, where you may make or lose money, money in a CD will grow predictably.

Some banks will also offer an adjustable-rate CD, where you have the option to adjust the CD’s rate a limited number of times.

Depending on the bank and type of CD, you may be able to withdraw your money from a CD at any time. However, there will be penalties, usually one to two months’ worth of interest.