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Why Would Someone Use a Certificate of Deposit?

October 15, 2024

Certificates of Deposit (CDs) offer a secure way to grow your savings with a fixed interest rate. Unlike traditional savings accounts, CDs lock in your money for a set period, often providing higher returns. When you know why people choose, CDs can help you decide if they fit your financial goals

In this guide, we’ll explore how CDs work and why people use them. Then, we’ll look at who should consider them and some alternatives.

Certificate of Deposit Overview: How They Work

A CD is a deposit account with a fixed interest rate and a specified term length. They usually have fixed terms, fixed interest rates, and early withdrawal penalties.

You agree to keep your money in the CD for a set period, ranging from a few months to several years. The rate is predetermined and remains constant throughout the term, which makes returns predictable. However, if you withdraw your money before the term ends, it often incurs a penalty, which can reduce your earned interest.

The predictability and security of CDs make them an appealing choice for those looking to save with minimal risk.

Reasons Why People Use CDs

CDs offer several advantages that make them a popular choice for saving. They will produce a return if you leave them on deposit for the full term, and they’re safe. Plus, CDs provide predictable growth and no market risk. Finally, they’re an excellent fit for short-term savings goals. Explore each of these features in depth.

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1. Returns

CDs offer a fixed interest rate, which means you know exactly how much money you will earn by the end of the term. This fixed rate helps you plan your savings without worrying about changes in interest rates. It’s a simple way to ensure your money grows at a steady pace as you build wealth.

2. Safety

If you establish the account at an FDIC insured financial institution, the FDIC insures your deposit up to a
certain limit, so your money is protected if the bank encounters problems. This insurance makes CDs a secure choice for saving, as your funds are safeguarded against bank failures.

3. Predictable Growth

With a CD, you know the interest rate and term length from the start. This predictability means you can easily calculate how much your money will grow over time. It’s a straightforward way to set savings goals and track your progress toward them.

4. No Market Risk

Unlike stock market investments, CDs are unaffected by market fluctuations. This means your returns are stable and unaffected by the ups and downs of the stock market. If you want to avoid the risks of market investments, CDs offer a more stable option for growing your savings.

5. Savings Goals

CDs are useful for reaching specific savings goals. The fixed term means you commit your money for a set period, which can help you avoid spending it prematurely. If you have a savings goal that you want to achieve by a certain date, a CD can help you stay on track and reach that goal.

Who Should Consider Using CDs?

The benefits are clear, but is a CD right for you?

CDs are ideal for:

Risk-averse savers.
Conservative consumers.
Short-term financial goals.

If you prefer a low-risk option for your savings, you might find CDs attractive due to their predictable returns and FDIC insurance. If you want to avoid the volatility of the stock market but you still want to earn interest on your savings, you might also like them.

Moreover, if you have a specific savings goal within a set time frame, CDs can offer a stable way to reach it. People often use them to save for events like weddings or vacations.

While CDs offer many benefits, they may not be the right choice for everyone. If you might need quick access to your funds, a CD’s early withdrawal penalties could be a drawback.

Finally, if inflation rates rise significantly, the fixed interest rate on a CD might not keep pace with inflation, potentially reducing your purchasing power.

Learn more about CDs and IRAs to see how they fit into your broader financial strategy.

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The Best Alternatives to CDs

While CDs can be great, they’re not your only low-risk savings option. In fact, there are a handful of choices that can better suit certain situations.

If CDs don’t quite fit your needs, consider these alternatives:

High-interest savings accounts.
Money market accounts (MMAs).

High interest savings offers flexibility and better liquidity with competitive interest rates. MMAs give you higher interest rates than regular savings accounts and limited check-writing capabilities.

Each of these alternatives will have different terms and conditions. So, compare these options to find the best fit for your financial goals. For more details, explore our savings products.

Choose the Right Saving Strategy With Centier

Certificates of Deposit are a reliable option for those seeking predictable returns and safety for their savings. Whether you're saving for a short-term goal or prefer a low-risk growth method, CDs provide a stable and predictable way to grow your money.

Evaluate your financial needs and consider how CDs or their alternatives can best support your goals. Ready to explore more? Check out our savings, loans, mortgage, and investment calculators to learn about different saving strategies.

To discuss your options, schedule an appointment with a Centier expert.