You have a lot of options for housing your savings. A savings account is a secure way to earn a bit of interest while keeping your money accessible. You could also invest your money if you're comfortable taking a bit of a risk to get a larger return. Or you could try a certificate of deposit (CD).
Why invest in a CD? Below, we'll explore how these accounts work and three reasons you may want to consider placing some of your money in them.
1. Your principal is protected
Some people prefer to invest in a CD rather than the stock market because there isn't any risk of losing their principal. A CD is a type of bank account, and just like checking and savings accounts, you don't have to worry about losing any cash you put in one.
Money you invest in a CD is protected up to $250,000 per person by the Federal Deposit Insurance Corporation (FDIC) in case of bank failure. It's not actually a good idea to invest that much in a CD, but if you're looking for a safe way to earn a decent amount of interest on your savings, a CD is a good bet.
2. You can earn a higher interest rate than you'll get with a savings account
When you invest in a CD, you must leave your money untouched for a certain amount of time, known as the CD term. Withdrawing your funds early results in a penalty. But in exchange for keeping your money locked up, you usually earn a higher interest rate than you'd get with a savings account at the same bank.
You can secure a better CD rate if you choose a longer term, so if you don't think you'll need your savings for the next five years, you're usually better off putting your money in a five-year CD rather than a one- or a two-year CD.
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3. You can avoid early withdrawal penalties with careful planning
If you invest in a CD, you should be reasonably sure you won't need to withdraw your funds before the CD matures. But if you're worried about possibly incurring penalties, you can reduce this risk by setting up a CD ladder.
CD laddering involves spreading your money out over a series of CDs with different maturity dates rather than investing everything in a single CD. For example, if you have $5,000, you might put $1,000 each in a one-, two-, three-, four-, and five-year CD. This gives you access to some of your cash every year so if you need to withdraw funds, you can do so without penalty. If you don't need to withdraw your money when your first CD matures, you can always roll it over into a new, longer-term CD to take advantage of the higher interest rates on long-term CDs.
Investing in one of the best CDs is a great way to earn interest on your money without the risks associated with investing in the stock market. Just be aware that some CDs require a minimum deposit. This could be anywhere from a few hundred to a few thousand dollars. If you can't meet these minimums, you may have to explore some other options. But if you can meet them, it could be smart to invest in a CD to help grow your savings.
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About the Author
Kailey has been writing about banks, credit cards, loans, and all things personal finance since 2012. She also writes for The Ascent's parent company, The Motley Fool. Her work has appeared on USA Today, CNN Money, Fox Business, and MSN Money. She's a graduate of the University of Wisconsin and happily lives in the woods of northern Wisconsin where she grew up.
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