Even though they’ve been around for a long time, consumers still harbor misconceptions about certificates of deposit (CDs).
That’s unfortunate, since CDs can offer a solid return on your money without undue risk or worry, especially if you invest in them strategically as part of a laddering plan. They almost always earn more than a regular checking or savings account, they make your money less susceptible to impulse purchases, and they can play an important part in your overall savings campaign.
“Maybe you want to use your cash to buy a car or make a down payment on a house pretty soon,” notes the Wall Street Journal. “If you won’t need your cash reserve the day after tomorrow or next week, you’ll likely want that money to earn a better rate of return than your checking account offers — without taking on too much risk. This is when a CD is useful.”
Despite all these perks, many people are still hesitant to give CDs a try. Let’s explore some common myths people believe about CDs.
Myth No. 1: “There’s only one kind of CD.”
Fact: Not only is there an important difference between fixed-rate and variable-rate CDs, but also in the category are jumbo CDs (requiring a deposit of $100,000 or more), IRA CDs (offering many benefits of traditional or Roth IRAs), and liquid/no-penalty CDs (providing more flexibility in withdrawals).
Myth No. 2: “I need a lot of money to get a CD.”
Fact: Many people mistakenly believe they need $5,000 to $100,000 to open a CD, but in fact they’re often available for $500 to $1,000. That makes them appealing for those wishing to give them as gifts.
Myth No. 3: “I can lose my money with CDs.”
Fact: That may be true for investment CDs that are tied to the stock market, but it is simply not true for federally insured CDs. Government institutions (the FDIC and the NCUA) insure vehicles valued up to $250,000. Even if you withdraw your money early and incur the resulting penalty, the penalty is typically only a small portion of the interest you’ve earned.
Myth No. 4: “My savings or checking account is the best risk-free vehicle for my money.”
Fact: That’s only true if you need frequent access to your money, if your account service fees are minimal, and if you’re somehow earning better interest rates than with CDs, which is unlikely. If you can separate a portion of your savings for a CD, you’ll earn a higher interest rate and be less tempted to spend it.
Myth No. 5: “CDs will keep my money unavailable for a long time.”
Fact: Most credit unions and banks offer CD terms as short as 1 year, but if that makes you uncomfortable, you may want to consider putting your savings into a Money Market Account instead. Many buyers strike a compromise to keep part of their money liquid, i.e. “CD Laddering” or buying multiple CDs with staggered maturity dates so they have frequent opportunities to remove their money (or reinvest it) as needed.
Myth No. 6: “I could possibly miss out on better interest rates.”
Fact: We understand the natural tendency to hope for rate increases, but we feel it’s necessary to point out that national CD interest rates have been fairly steady since the Recession of 2008.
So there you have it. CDs are a great way to put some money aside to earn a higher rate than a traditional savings or checking account can offer. Ready to give it a try?