If you're looking for a low-risk investment that offers a predictable return, a certificate of deposit (CD) can be a great consideration when it comes to adding to your portfolio. Whether you're new to CD investments or considering how they might support your long-term savings goals, understanding how they work is an important part of any personal finance strategy.
What is a Certificate of Deposit?
A certificate of deposit is a type of savings account offered by banks, credit unions, and other financial institutions. CDs pay a fixed interest rate over a specified period of time, known as the term or maturity date. In exchange for agreeing to leave your money in the account for the full term, you typically receive a higher interest rate than a standard savings account or money market account.
How CDs Work
When you invest in a CD, you deposit a lump sum of money with an issuing bank or credit union for a fixed term, which could range from a few months to several years. The bank pays you interest, either monthly or at maturity, depending on the account. The longer the term, the higher the CD rates tend to be, although this can vary depending on market conditions and the financial institution. Most CDs are FDIC-insured up to applicable limits, offering peace of mind for depositors seeking guaranteed returns.
Understanding CD Rates and APY
The interest you earn on a CD is expressed as an annual percentage yield (APY), which reflects the total interest earned over a year, including the effects of compounding. Fixed interest rates on CDs can vary between banks, credit unions, and brokerages, with high-yield CDs often offering the most attractive returns. However, it's important to compare APYs and understand early withdrawal penalties, which can reduce your earnings if you need to access your funds before the maturity date.
Strategies for CD Investments
One common investment strategy is a CD ladder, which involves opening several CDs with staggered maturity dates. This allows you to take advantage of higher yields on longer-term CDs while maintaining some liquidity with shorter-term CDs. Another approach is the ‘barbell strategy,’ which splits your investment between short-term and long-term CDs to balance risk and return. Whether you choose a 1-year CD, 2-year CD, or longer-term CD, the goal is to align your CD investments with your financial goals and savings timeline.
Bank CDs vs. Brokered CDs
Bank CDs are issued directly by an insured bank or credit union, while brokered CDs are purchased through a brokerage account and may offer access to a broader range of CD terms and issuers. While both can be low-risk investment options, it's important to confirm whether the CD is FDIC-insured or SIPC-protected and to understand the terms and potential risks of each.
Why CDs Make Sense for Some Investors
CDs can be a great fit for conservative investors, retirees, or anyone seeking a low-risk way to earn a fixed rate of return. They offer stability, predictable income, and protection from market volatility, making them ideal for certain savings goals or as part of a diversified investment portfolio. With flexible term lengths, guaranteed returns, and the backing of an insured bank, CDs are an attractive option for building fixed income over time.
Ready to Open a CD?
At Mainstar Trust, we offer the option to invest into CD’s to support your financial plan. Once you identify the CD you wish to purchase, our experienced team is here to help you set up your IRA and fund the purchase. Reach out today to learn more about our process and how CDs can be added into your overall investment strategy.