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Attractive CD Rates, but First: What is a Certificate of Deposit or CD?



At Paycheck to Wealth, we have talked about the three key financial buckets that are needed to have wealth-building success. Just as a reminder, the three things that are needed for a solid wealth plan are: 1) Emergency Savings, 2) Protected Investments, and 3) Growth Investments. Today we will talk more about Protected Investments in the form of a Certificate of Deposit or CD.


You might be wondering, what is a certificate of deposit or CD? A CD is a savings product that is offered by financial institutions like banks and credit unions. It earns an interest on your deposit for a fixed period of time. In plain terms, your investment shows the amount of money that you used to purchase the CD at the financial institution, and it also states the guaranteed interest rate that you will receive for a certain period of time. The time can range from as little as 3 months, 6 months, 9 months, etc. up to several years. The choice is yours for the amount of time that you would like to have your money invested in the CD.


CDs differ from regular savings accounts because the money must remain untouched for the entirety of the deposit term that you select for the CD. If you do not keep the money invested in the CD untouched for the designated period, then you risk early withdrawal penalty fees or lost interest because the CD was not held until its maturity. One good point about CDs is that it usually has higher interest rates than savings accounts to serve as an incentive for you not to withdraw the money. For the lost liquidity or the inability to get your money penalty free before the CD matures you get a higher interest rate.


As with all investments, shopping around is very important to finding the best CD rates because different banks or credit unions offer a surprisingly wide range of interest rates. For example, your neighborhood bank might pay a small interest rate for a long-term CD, while an online bank or local credit union might pay a much higher interest rate for a shorter term. In the year 2023, many of the shorter period CDs especially at some of the online banks are paying a higher interest rate than what you might find on the longer-term CDs. The risk, of course, is that if CD rates go down in the near future, then you will have to purchase your new CDs at a lower interest rate than what you had. In this case, the longer-term CD might have been a better option because it would still be paying the higher interest rate since it was purchased for a longer period.

Since CDs are part of the Protected Investment financial bucket, it is a safer and more conservative investment than stocks and bonds. As such, it offers a lower opportunity for growth, but with a non-volatile, guaranteed rate of return. CDs offer a fixed, safe—and federally insured—interest rate if opened at a bank or credit union. This allows you to sleep at night knowing your principal or initial investment is safe with a guaranteed interest rate earned when the CD matures. That’s why Protected Investments offer you peace of mind with no worry from an up and down stock market.


There have been advertised CD rates paying as much as 5% interest for an 11 month or 13 month holding period. If you are able to leave your money invested in the CD for 11 to 13 months during the maturity period, then this is a good option to consider for your Protected Investments financial bucket.


With so many CD choices out there, how do you decide which one to choose? That's where Paycheck to Wealth is here to help. Please contact us today to learn more about adding CDs as part of your Protected Investment financial plan.

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