If you want to invest your money, there are a bunch of options available for you starting from stock investment, gold investment, real estate investment, and many others. In investing, there are always risks yet usually together with the greater risk, the greater return you can make. However, for those who seek for a lower risk, there is an option for investing. Certificate of deposits are a low risk type of investment which allow you to make some money. It is backed by the National Credit Union Administration and the Federal Deposit Insurance Company. Basically, certificate of deposit (CD) works when you purchase a CD from a bank or credit union in which you invest some money with higher interest rate, you are not allowed to draw your invested money for specific period of time.
CD is considered to be the least risky investment currently since it is guarantee by governmental institutions and a system of check and balance up to $250,000.
2. Higher Interest Rate
Compare to saving account, CD offers best possible returns. It is because the interest rate of CD is generally higher than saving deposit. The longer term you lock you money, the higher yield of interest rate you can get. The interest will accrue throughout the term until it reaches maturity.
3. Wide Selection
There are several kinds of CDs you can choose depending on the banks or credit unions. You can also choose the time frame or the maturity date usually from one to five years that fit you.
1. Limited Liquidity
The reason why you purchase a CD is to lock it for a set period of time. It means that you do not have the access to your invested money since you have agreed with the term and condition. If you are in an emergency situation and want to draw your money immediately, generally, most banks and credit unions will cost you some severe early withdrawal penalty. You have to pay certain fee, usually a big amount of money and you do not want to do that. Therefore, you should set your own maturity date that suitable for you.
2. Inflation Risk
CDs can be quite risky when it comes to inflation. The interest rates of CDs are normally at fixed rate and when sudden inflation occurs, you may lose the purchasing power of your money since the interest rate gains are overtaken by the inflation.