Take Your Savings Further With Certificates of Deposit
Everyone knows that saving money for a rainy day is a virtue. After all, saving for the future can improve your peace of mind and open up your budget for those times you really need it.
But what if you’re interested in taking your savings a little further? In this case, you may want to try incorporating a certificate of deposit into your savings strategy.
How a Certificate of Deposit Works
Often shortened to “CD,” a certificate of deposit is a type of savings account. You agree to deposit a pre-determined amount of money to your financial institution and keep it there for a fixed period, known as a “term.”
After the period is up, the CD “matures,” and then you may withdraw the money or “roll over” the balance into another account, and even put it into another CD if you want to.
While the term of the CD is active, you are not supposed to withdraw the money. If you do, you may be on the hook for an early withdrawal fee, which can be substantial. When left untouched during the term, the account will accrue interest and boost your savings.
The Big Draw of CDs
Now, why would you want to put your cash into such an account if you’d be punished for making a premature withdrawal? It’s because of the interest rates that CDs offer. Generally speaking, a certificate of deposit accrues interest at a higher rate compared to a traditional or money market savings account.
Certificates of deposit are available in a variety of terms, ranging from a few months to even years. The interest rates are different according to the term.
Advantages of a CD
Now that you are familiar with a certificate of deposit, why would you want to open one? There are key benefits to CDs:
- Stable Rates: Once you open a certificate of deposit, the interest rate is “locked in” for the term. That means that your rate won’t fluctuate throughout the term, which makes your end balance more predictable. In other words, the amount you initially deposit can only increase when left untouched for the full term.
Another handy feature of CDs is that financial institutions will sometimes extend special rate offers for accounts that are about to mature. This allows you to generate more savings the longer you lock your money away—handy if you are saving towards long-term goals.
- Deposit Insurance: One of the strongest benefits of the CD is its stability. Banks and credit unions offer certificates of deposit, and these accounts are federally insured.
“Federally insured” means that the government will protect a set amount of your funds (up to $250,000 per institution) in the event the financial institution fails. The Federal Deposit Insurance Corporation (FDIC) covers banks, while the National Credit Union Administration (NCUA) protects credit unions.
- Relatively Higher Returns: Are you trying to build an emergency fund or need to prepare for an expense that you know is just beyond the horizon? A CD can help you reach those goals a little faster.
In relative terms, a CD generates higher dividends compared to a checking account and even a money market savings account. That’s the tradeoff with a certificate of deposit: while your funds are locked away, they are working harder for you.
- Impulse Control: Perhaps one of the disadvantages of the certificate of deposit can be seen as a strength. Depending on your budgeting style, the penalty for early withdrawal could be a deterrent against random spending.
How You Might Use CDs
The ways that you save money are entirely up to you. Adding a CD to your strategy can allow you to reach those savings goals more confidently. Here are a few practical applications:
- Building a Sinking Fund: Let’s say you’re working towards saving money for a concrete goal, such as the down payment for a car loan or a scheduled expense like a vacation or insurance payment. So, you open a CD to get started.
Since the money is in this specific account, you know that it is reserved for a specific purpose. It’s also locked away, because of the conditions of a CD. You have a way to stay true to your savings strategies.
- Working Towards Retirement: Certificates of deposit can also be used to nurture a nest egg. Some financial institutions have CDs that are purpose-built for these occasions in the form of IRA certificates of deposit. Depending on the certificate you open, you could have access to certain tax advantages.
One of the attractive aspects of using CDs for longer-term savings is their stability. Certificates of deposit are not subject to market fluctuations during their term, making the money in those accounts more stable. Please consult with a certified financial professional when discussing savings strategies for retirement.
If you’re interested in letting your savings work harder, certificates of deposit may have a place in your plans. First Florida offers CDs over a variety of savings periods, giving you firm control over your finances. Visit a branch or contact us for more information.