Why Should I Invest Into CDs?

CDs (certificates of deposit) are a well known investment, utilized by investors around the world. Just like most any type of investment, there are advantages and disadvantages of CDs that should be taken into consideration when building a personal investment portfolio. Some of the advantages to consider of investing into CDs include: liquidity, CD laddering, current income, preservation of capital, and FDIC insurance.

Liquidity

One of the most significant benefits of investing into CDs is the overall liquidity. Investing into CDs often gives investors the ability to gain access to their cash in the event of a short term need, without paying significant penalties. While there are generally interest rate penalties for early withdrawal, many investors will stagger their CDs so that they have less of a chance of paying a penalty if they need access to their capital.

One of the methods for creating additional flexibility for their capital is to create a CD laddering strategy. CD laddering is a strategy that involves purchasing CDs with different rates and at different maturity dates. This creates a method where CDs will be maturing on a regular basis. This will present the opportunity to have access to capital on a regular basis without early withdrawing penalties. If the investor does not need access to their capital, they can simply reinvest it into a new CD when it becomes mature.

Competitive Cash Rates

CD rates are generally higher than most other savings products or cash products offered by banking institutions. Other common cash products include savings accounts, checking accounts and money markets. For investors who have extra cash on hand and who desire to earn a higher interest rate, CDs are an excellent option for consideration.

Preservation of Capital

Another primary reason why CDs are popular investment choices is that on top of the CD rates being paid to investors, the capital investment will also be returned to the investor at the CD’s maturity date. For conservative investors who still seek interest rates that are competitive along with security of capital, CDs are an excellent choice. The protection that is offered for investors is provided by FDIC insurance, insuring that in the event that the bank closes, the investor will have their investment returned to them.

Current Income

Many investors leverage CDs as an investment choice for current income. While CDs do not provide consistent income during the investment period, they do provide interest upon the CD’s maturity date. So, when the CD becomes mature, the investor will gain their original capital investment along with their earned interest. In order to receive regular income from CDs, a common strategy that will be used is to ladder CDs with different maturity dates and different interest rates. For example, if an investor purchases $1,000 CDs each month over 12 months, they will then have one maturing each month moving forward. This strategy can allow an investor to have regular interest income, to reinvest the capital into another CD or to withdrawal the entire investment amount when the CD becomes mautre.