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Investing in CDs is a Good Idea and Here’s Why

 July 5, 2022

By  Elle Gellrich

It can be tough to make money grow. Many people invest in stocks, which can be a high-risk, high-reward proposition. Or they might invest in real estate, which can also be risky. But there’s another option that is often overlooked: investing in CDs. Here’s why it might be a good idea to do just that.

1) Interest

When you invest in a CD, you are essentially lending money to a bank for a set period of time. In exchange for that, the bank agrees to pay you interest. The interest rate on CDs is usually higher than the rate on savings accounts, and it’s also higher than the rate on most other types of investments. That means that you can grow your money more quickly by investing in CDs.

Plus, with a CD, you know exactly how much interest you’ll earn. There are no surprises. With other investments, such as stocks, the return can be much higher or much lower than you expect. In order to know the best CD rates available, you’ll want to research online or ask a financial advisor. This way, you can be sure to get the best return on your investment.

For example, if you have $1,000 to invest and you can get a CD that pays 5% interest, you will earn $50 in interest over the course of a year. That’s not a huge amount of money, but it’s more than you would earn if you kept your money in a savings account. And if you reinvest that interest, you can start to see some real growth.

2) Safety

When you invest in a CD, your money is FDIC-insured, which means that it’s backed by the full faith and credit of the United States government. That makes CDs a very safe investment. In fact, it’s about as safe as you can get with investments.

Of course, nothing is completely risk-free. The interest rate on CDs can go down as well as up, so you could end up losing money if you need to cash in your CD before it matures. But as long as you’re comfortable with that risk, CDs can be a good way to grow your money.

Additionally, some CDs have what’s called a “step-up” feature, which means that if interest rates go up, you can automatically get a higher rate on your CD. That can help offset some of the risks of investing in a CD. Also, if you have a longer-term goal in mind, you can invest in a CD with a longer-term, which will usually give you a higher interest rate.

This way, you can minimize your risk while still earning a decent return on your investment. Keep in mind, though, that the longer the term of your CD, the more you’ll lose if interest rates go up.

3) Flexibility

CDs come in a variety of terms, from 3 months to 5 years. That means you can choose a CD that fits your investment goals. If you need your money to grow quickly, you can choose a shorter-term CD. Or if you’re looking for a longer-term investment, you can choose a 5-year CD.

You can also choose from a variety of “callable” CDs, which allow you to cash in your CD early if interest rates go up. This can be a good way to get some flexibility with your investment.

Plus, you can always cash in your CD before it matures if you need to. There may be a penalty for doing so, but it’s usually not too steep.

When you invest in a CD, there is usually a penalty for withdrawing your money before the CD matures. This penalty is designed to discourage people from cashing in their CDs early.

The amount of the penalty varies from bank to bank, but it’s usually around $25 per withdrawal. So if you cash in your CD before it matures, you’ll lose some of your interest earnings.

4) Tax advantages

Investing in a CD can also offer some tax advantages. For example, if you invest in a CD that is held in an IRA, the interest that you earn on the CD is tax-deferred. That means you won’t have to pay taxes on it until you withdraw the money from your IRA.

Similarly, if you invest in a CD that is held in a 401(k) or another retirement account, the interest that you earn on the CD is tax-deferred. That means you won’t have to pay taxes on it until you withdraw the money from your retirement account.

Of course, you will eventually have to pay taxes on the interest that you earn on a CD. But by deferring those taxes, you can let your money grow more quickly.

5) Stability

Investing in a CD can help to stabilize your portfolio. That’s because CDs tend to be less volatile than other types of investments, such as stocks and mutual funds.

When you invest in a CD, you’re investing in a stable, low-risk product. That can be helpful for stabilizing your portfolio and reducing your overall risk. Not only that, but if you choose a longer-term CD, you can also benefit from the stability that comes with a longer-term investment.

For example, let’s say you have $10,000 invested in a CD that pays 5% interest. If the stock market falls by 10%, your investment will be worth $9,000. But if interest rates fall by 1%, your CD will still be paying 5%.

When you invest in a CD, your money is insured, which means that it’s backed by the full faith of the government. That makes CDs a very safe investment. In fact, it’s about as safe as you can get with investments. Of course, nothing is completely risk-free. The interest rate on CDs can go down as well as up, so you could end up losing money if you need to cash in your CD before it matures. But as long as you’re comfortable with that risk, CDs can be a good way to grow your money.

Elle Gellrich


BayCitizen.org

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