Why would a certificate of deposit lose value?
All investments carry some degree of risk, but CDs are as low-risk as they come. That said, inflation, early withdrawal penalties and interest rate fluctuations can all eat into your CD's value.
While it's unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you've earned enough interest to cover the penalty charged. Typically, CDs are safe time deposits that guarantee an interest rate for the term that you agree to keep money at a financial institution.
Similarly, decreases in the federal funds rate cause CD rates to fall. Part of the draw of opening a CD is that its earnings are guaranteed regardless of economic environment changes. If you lock in an interest rate by purchasing a CD, you'll be paid that guaranteed rate for the entire term of the CD.
- Accessibility. With a savings account or money market account, you're allowed to make a certain number of withdrawals of cash or transfer funds to a linked checking account. ...
- Early Withdrawal Penalties. ...
- Interest Rate Risk. ...
- Inflation Risk. ...
- Lower Returns.
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
Are CDs safe to invest in? Yes, CD investments up to $250,000 are safe if they are held with a bank insured by FDIC or a credit union insured by NCUA. In today's high interest rate environment, buying CDs is a great way to earn high interest while keeping your principal secure.
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.
A one-year CD typically offers a higher interest rate than shorter-term CDs, such as three-month CDs and six-month CDs. Offers higher interest rates than traditional savings accounts.
Can you lose a certificate of deposit?
Can you ever lose money on these accounts? You generally can't lose money with a CD from a financial institution insured by the FDIC or NCUA. Unlike stock investments, CDs don't fluctuate in value.
Market Crashes and CDs
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
Term Length | Average APY | Interest earned on $10,000 at maturity |
---|---|---|
1 year | 1.81% | $181 |
2 years | 1.53% | $308.34 |
3 years | 1.38% | $419.74 |
4 years | 1.29% | $526.07 |
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
No investment is 100% safe from a default, not even certificates of deposit. Stay diversified and keep up with sound financial habits.
With CDs, there is always the risk that the returns won't be able to keep up with inflation. However, CDs purchased through a bank offer security that other investments don't, since they are insured by the Federal Deposit Insurance Corp.
If you have short-term savings goals, like to help pay for your wedding, a CD is likely the better fit. If you are saving for retirement, an IRA can offer better returns over the long run.
The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time. While that amount will be different for everyone, you should keep a few things in mind.
Should I lock in a 5% CD now?
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
With higher APYs and possible interest rate cuts coming, certificates of deposit (CDs) could be worth adding to your personal finances in 2024. CDs are safe investments when you put your money in FDIC-insured banks (or NCUA-insured credit unions).
The ideal number of CDs to have can depend on your financial goals. For example, you might open one CD to save money toward the purchase of a car and another CD to save money toward a down payment on a home. You could also open CD accounts to save for other goals, such as college or retirement.
How much you earn on a $100,000 CD varies, depending on the APY. For example, if your CD has a 5% APY, you'd earn $5,000 after one year.
Here's how much money you'll earn on a $5,000 5-year CD at each of these institutions: Bread Savings at 4.75%: $1,305.80 (for a total of $6,305.80 after five years) Popular Direct at 4.70%: $1,290.76 (for a total of $6,290.76 after five years)
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