Sometimes, based on the movement of the market and your risk tolerance, you may look for investment opportunities with a strategy encompassing wealth growth while mitigating the risk of unanticipated loss. There are two popular financial instruments investors consider for this type of investment. They include certificates of deposit (CDs), and high-yield savings accounts.
Certificate of Deposit
A CD can be a good investment at any time because it is insured by the Federal Deposit Insurance Corp. (FDIC) if taken out at an FDIC-member bank and offers higher interest rates than a savings account. One thing to keep in mind is that a CD has a maturity date. The terms of your CD can span from a couple of months to years.
Here are a few tips for determining when a CD might be a wise investment:
Pros of investing in a CD:
- CDs pay a higher interest rate than a savings account – Keeping money in a savings account over a long period of time can hurt because they can lose value due to inflation. The higher interest rate offered by a CD can help mitigate the blow from inflation as long as the inflation doesn’t rise too much.
- CDs have fixed or flexible terms – CDs come in fixed-rate and flexible-rate depending on your preference. This in itself provides a layer of flexibility. A flexible rate is an interest rate that may increase or decrease over the term whereas a fixed-rate CD generally remains the same for the length of the investment.
- Low risk – As long as the bank you are using is FDIC insured, your investment is considered very low-risk.
Cons of investing in a CD:
- Bank stability – As with any savings account, a CD is as secure as the bank that holds it. If the bank is not FDIC-insured and it fails, you could lose your money.
- Liquidity – Funds are locked up for a fixed period of time.
- The rate of return is not as high as other opportunities – The rate of return for a CD is lower than some of the alternatives like stocks, bonds, or index funds.
- Penalties for early withdrawals – Withdrawing funds from a CD before it matures could subject you to penalties.
High-Yield Savings Account
A high-yield savings account is a type of savings account that pays a higher interest rate on deposits than a traditional savings account. It is generally recommended for a short-term savings strategy for things like growing an emergency fund, weddings, or vacations. Like anything, this type of account has positive and negative attributes.
Pros of investing in a high-yield savings account:
- Ability to grow your wealth – High-yield savings accounts are interest-earning higher than a traditional savings account. These accounts can also benefit from compound interest growth, which means you earn interest on your interest.
- FDIC insured – Your funds are FDIC insured up to $250,000 if your bank is an FDIC member. The insurance kicks in automatically; applying for coverage is unnecessary. Should there be an incident, the FDIC disburses funds to qualifying account holders within two business days.
- Low risk – Your funds are not susceptible to fluctuations in the market.
- Funds are easily accessible – Unlike a CD, funds in a high-yield savings account are easy to withdraw if needed.
Cons of investing in a high-yield savings account:
- Minimum balance requirements – Certain high-yield savings accounts require minimum balance requirements.
- Rate volatility – Similar to credit card rates, savings account rates can change. The changes aren’t always wrong; however, predicting how much you can earn in interest in a specific year is very difficult.
- Long-term savings – Even though interest rates are higher than traditional accounts, they won’t always be high enough to keep up with inflation.
- Withdrawal limits – In some cases, if a customer makes more than the specified withdrawals in a month, they can be charged a fee.
Before making any decisions that could impact your financial strategy, consider consulting a financial professional and learn how you can make your money work for you.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
High-yield savings account vs. a CD: What's the difference? (cnbc.com)
CD vs. Savings Account: What’s Smarter Right Now? (investopedia.com)
Pros And Cons Of Using A Certificate Of Deposit (CD) For Your Savings – Forbes Advisor
High-yield savings accounts: Pros, cons and best uses | Fortune Recommends
Looking to invest? Here's why it's a great time to get a CD. - CBS News
When should you open a high-yield savings account? - CBS News
This article was prepared by LPL Marketing Solutions
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