Should You Invest in a CD?

If you’re looking for a safe place to invest your money a bank-issued certificate of deposit (CD) may be the answer. The return rate is low when you compare it to other investment options, but the return is guaranteed. You will always increase your funds; you will never lose money.

Time is Money

Another issue you’ll want to consider is the amount of time you want to tie up your money. When you put your funds into a CD you must leave if for a designated period. That could be three months or three years, depending on the offer. If you put money into a CD and want to withdraw it before the designated time you will have to pay penalty fees. Here are your considerations.

Low risk, low return.

1st Source Bank and other financial companies offer CDs as low-risk investments. You are guaranteed to make some money, but the rate of return is much lower than it would be in the stock market or another investment option. If you are interested in investing in a CD, you can simply walk into a 1st Source Banking Center near you and deposit your funds into one. You can also purchase a CD through a broker.

As we mentioned earlier CDs are typically available covering different periods of time. One CD might require that you keep your dollars invested for three months, and another might require a year or more. If you withdraw your money before this period ends, you’ll face withdrawal penalties. You’ll want to make sure you can keep the money you place in a CD for as long as your financial institution requires.

Once your CD reaches its end date — known as maturing — you’ll receive your original deposit back along with the interest that this deposit generated. Remember that interest earned on a CD is taxable income.

The Advantages of a CD

The main advantage of a CD is the stable nature of the investment. Deposits in a CD are insured, so even if your bank or credit union goes under, you will not lose the money you’ve invested.

You also know up front the interest rate on your CD. This means that your rate of return is guaranteed. There won’t be any unpleasant surprises — or any surprises at all — once your CD matures.

The Disadvantages of a CD

CDs are safe because you’re guaranteed a return on your investment, but they do have disadvantages. First, you’ll be tying up your investment dollars for a potentially long time, often as much as a year or more. You will not be able to access those dollars, whether to spend them or move them into a new investment vehicle, without paying a financial penalty.

However, the potentially bigger drawback is that CDs, despite their stable nature, don’t have exceptionally high rates of return. You will not lose money by investing in a CD, which is part of their appeal. However, you might not make as much money as you could have by investing in the stock market.

Bottom Line

Only you can determine if a CD is the right choice for you. It comes down to how much risk you are willing to tolerate when investing and where you are in your life’s journey.