While music CDs don’t look like they’ll be making a comeback like vinyl did, Certificates of Deposit – the original CDs – are looking more and more like a smart investment right now. The earning potential of CDs is higher now than it has been for several years. And if you’re already saving for a specific goal like a down payment on a house purchase later this year or a vacation you’re planning, a CD is worth considering.
Before you start saving with a CD, here are some basic facts you should know.
What is a Certificate of Deposit?
A Certificate of Deposit (CD) is a savings account offered by banks and credit unions, in which the money you deposit earns a fixed rate of interest for a specified length of time, or term. CDs come in a range of terms, from as short as three or six months, to five years or more.
How is a CD different from a regular savings account?
CDs differ from savings accounts in two main ways:
1. No withdrawals. With a regular savings account, you can withdraw money as you need it. With a CD, you must leave the money in your account for the full term of the CD. If you withdraw money earlier, you will charge you a penalty.
2. Higher interest. Because you agree to leave your money in the account for a predetermined time, your bank or credit union pays higher interest on CDs than on traditional savings accounts. Which means that your money makes more money. For instance, MSGCU currently offers a 9-month CD at a rate of 4.40% APY*. How much would that earn you? If you invested $10,000 in less than one year you would have earned $335 on your initial deposit.
Certain CDs provide a one-time opportunity to increase your interest rate if rates go up during the CD's term, allowing for potentially greater earnings. For example, all MSGCU CDs with a term of three years or longer include a no-cost rate bump.
When should you choose a CD over a savings account?
Both CDs and savings accounts play important roles in managing your money. If you need to access money easily, such as with an emergency fund, you should use a traditional savings account. But if you already have such funds set aside and you’re saving for a longer-term goal, investing in a CD could be a smart move.
Here are a few situations where CDs might fit the bill:
- You’re saving for a future purchase that’s still months or years away, such as:
- A down payment on a new home
- A dream vacation or splurge item
- A new vehicle
- College tuition
- Home renovations
- You have extra savings available in a no- or low-interest account, and you’d like it to earn more
- You have extra money from a year-end bonus or tax refund and you don’t need the cash immediately
- You’d like to give an investment gift to a family member, like a grandchild
Pros and Cons of CDs vs. other investments
The Pros:
- Guaranteed returns. You don’t need to capture a leprechaun to get extra coins. The interest rate on a CD is fixed and guaranteed; it is a risk-free investment.
- Safety. Your funds are insured up to $250,000 by the FDIC for bank CDs, or by the NCUA for credit union CDs.
- Higher interest than savings. While MSGCU’s silver and gold savings accounts offer very competitive savings rates, most savings accounts offer either no interest or very low interest rates.
The Cons:
- No withdrawals. Unless you pay a penalty for early withdrawal, your money is inaccessible for the term of the CD.
- Minimum deposit. Many CDs have minimum deposits in the thousands, although MSGCU’s minimum deposit for CDs is just $500. MSGCU’s Grow-With-Me CD has a minimum deposit of just $250 (and you can add money to this CD, unlike others).
- Lower payback than some other investments. Investing in stocks, mutual funds or other investments can yield greater earnings, though they carry risk. These kinds of investments have their place in a diversified portfolio, especially for goals further than 5 or 10 years away. However, CDs can help balance out their greater risk with guaranteed returns.
Is a CD the right choice for you?
Still not sure if a Certificate of Deposit is the right investment for you? Ask for guidance. MSGCU team members are available to help. Call, video bank, stop by, or make an appointment to begin!
*APY = Annual Percentage Yield. $500 Minimum Average Daily Balance Required. Certificate of Deposits will automatically renew at maturity. You have a grace period of ten (10) calendar days after the maturity date to withdraw the funds in the account without being charged an early withdrawal penalty. Promotional Certificates will automatically renew at maturity to a standard term Certificate offered at the time of maturity.
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