5 Things to Consider Before Buying CDs

When interest rates are high people are understandably inclined to seek a higher return for their cash balances in banks and brokerage accounts. You might be shocked to see how little your interest-bearing accounts are earning, even in a world of generally elevated rates. We suggest checking your statements to see if this is true for you.

A popular option for people wanting a higher return for their cash is a Certificate of Deposit, commonly known as a CD. A traditional CD is a simple product, a bank, credit union, or other financial institution offers the potential certificate holder a fixed rate for a fixed term. It is, effectively, a bond.

Long considered a low-risk way to earn higher returns than traditional savings accounts, CDs are a viable option for some. But, before you sign on the dotted line, it's important to consider a few key factors to ensure a CD is the right choice for your situational needs.

1.      Interest Rates: Often the first thing potential investors notice, the advertised interest rate is probably the strongest attractant for any proffered product. Compare rates across financial institutions, not just your primary bank, to see if they’re offering the most competitive rates. High rates are desirable, and yet it’s important to understand the current interest rate environment to determine whether locking in a fixed rate for a specific term is the right choice for you, especially if rates are expected to rise in the near future. 

2.      Term Length: Since, theoretically, your cash will be unavailable for you to use, the term of the CD is a significant factor in the decision to buy. Terms range from a few months to several years. If you anticipate needing access to the funds in the during the term, don’t buy. You could also opt for a shorter-term CD but, if you can afford to lock your funds away for a longer period, a longer-term CD might offer a higher interest rate. 

3.      Early Withdrawal Penalties: Before finalizing your decision, carefully review the early withdrawal penalties associated with the CD. While CDs are designed to be held until maturity, unexpected circumstances may arise where you need to access your funds early. Understanding the penalties for early withdrawal will help you make an informed decision and be prepared for any potential financial implications. 

4.      FDIC Insurance: When buying a CD from a bank, ensure that it is FDIC-insured. This provides important protection for your funds, up to the maximum allowed by law. If you're purchasing a CD from a credit union, confirm that it is NCUA-insured, which offers a similar level of protection.  

5.      Reinvestment Options: Consider what will happen to your funds once the CD matures. Some institutions offer automatic renewal options, while others provide the ability to transfer the funds to a different account. Understanding these reinvestment options will help you plan ahead and make the most of your investment when the CD reaches its maturity date. 

The popularity of CDs doesn’t mean they’re the best option out there. Certainly, those who prefer not to stomach market fluctuations may truly benefit, but the rest of us have other options.  

We often use money market funds and the technology of platforms like MaxMyInterest to capture better cash returns for our clients. Because of these lesser-known possibilities, it’s important to discuss your options with your financial advisor before deciding.  

Keep your advisor informed of your goals and concerns and we’ll work with you to make the most of your money and help create the future you want.