Why CDs should be part of a savings strategy

When creating a savings strategy, it's key to take into account a variety of factors, including personal goals, time horizon, and the amount of money you expect to save. It can also be important to consider different vehicles for storing and growing your savings.

One savings product that can help you secure predictable returns is a certificate of deposit. In this guide, we'll discuss why CDs can make sense in a savings strategy and ways they can be implemented to build toward those savings goals.

When considering various savings options, it's important to explore all avenues to ensure your money works efficiently. One such option is a certificate of deposit (CD). But are CDs a good savings option? Let's take a look at what makes CDs unique and how they fit into a comprehensive savings strategy.

A certificate of deposit (CD) is a savings product offered by banks and credit unions that provides a fixed interest rate for a specified term. Unlike regular savings accounts, CDs require you to lock in your funds for a predetermined period, ranging from as short as one month to as long as several years. In return, CDs typically offer higher interest rates compared to standard savings accounts.

• Higher interest rates: CDs usually offer better interest rates than regular savings accounts, making them an attractive option for those looking to maximize their returns.
• Predictable returns: With a fixed interest rate, you know exactly how much your savings will grow by the end of the term.
• Safety: CDs are generally considered to be a low-risk investment.

A savings account is a deposit account at a bank or financial institution that allows you to store money securely while earning interest. Unlike checking accounts, savings accounts are designed for holding money rather than frequent transactions.

• Easy access: Savings accounts are easily accessible, making them convenient for emergency funds or short-term savings.
• Interest earnings: They offer a way to safely earn interest on deposited funds

Choosing between a CD and a savings account depends on your financial goals and needs. Here are some reasons why you might opt for a CD over a savings account.

• Stability and predictability: CDs offer a predictable rate of return. Unlike savings accounts, where interest rates can fluctuate, the interest rate on a CD remains fixed throughout the term. This predictability can be beneficial for those who prefer to know exactly how much their money will grow.
• Higher yields: One of the main advantages of CDs is their higher interest rates compared to traditional savings accounts. If you have a lump sum of money that you don't need immediate access to, putting it into a CD can yield higher returns, making it an efficient way to save for medium- to long-term goals.
• Discipline in saving: Because withdrawing money from a CD before its maturity date typically incurs penalties, CDs can help instill financial discipline. The penalty for early withdrawal can deter you from dipping into your savings for non-essential expenses, helping you stay committed to your savings goals.

While CDs have their benefits, they might not be suitable for all your savings. Here are a few reasons why diversifying your savings strategy is crucial.

• Lack of liquidity: CDs require you to lock in your money for a set period. If an emergency arises and you need access to your funds, you may face penalties for early withdrawal. This lack of liquidity can be a significant drawback if you don't have other accessible savings.
• Potentially lower returns compared to other investments: While CDs offer safety and predictability, they may provide lower returns compared to riskier investment options like stocks, bonds, or mutual funds. For long-term goals, diversifying into higher-yielding investments might be more beneficial despite the associated risks.
• Inflation risk: CDs typically offer fixed returns, which means if inflation rates rise significantly, the purchasing power of your money could decrease over time. In a high-inflation environment, the returns from CDs might not keep up with the rising cost of living, reducing their real value.

To make an informed decision, it's important to weigh the pros and cons of CDs. Here's a summary to help you understand their advantages and disadvantages.

• Safety and security: CDs are generally considered low-risk investments.
• Predictable returns: Fixed interest rates provide stability.
• Higher interest rates: Generally offer better rates than savings accounts.
• Financial discipline: Encourages long-term saving due to early withdrawal penalties.

• Limited liquidity: Funds are locked in until maturity.
• Lower return potential compared to other investments: May not yield as much as stocks or bonds.
• Inflation risk: Fixed returns may not keep up with inflation.
• Penalties for early withdrawal: You can lose interest or incur fees if accessed early.

The decision to include CDs in your savings strategy ultimately depends on your financial goals, risk tolerance, and need for liquidity. For conservative savers seeking a low-risk, predictable return on their investment, CDs can be a valuable part of a diversified savings portfolio. However, it's crucial to balance your savings in CDs with other investments to ensure you have both liquidity and the potential for higher returns.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.