5 big benefits of a 5-year CD to know now
When it comes to saving and investing your hard-earned money, there are a range of options available. For example, many savers know the benefits of putting their money in a savings account — especially a high-yield savings account, which tends to offer interest rates that are much greater than you'd get with a regular savings account.
But one often-overlooked choice is the 5-year certificate of deposit (CD). A CD works similarly to a savings account in that you earn interest on the money you deposit into the account, but the big difference is that you agree to leave your money in the account for the full CD term. Otherwise, you could pay penalties for taking out your money early. In return, you get a fixed rate of interest on your money that's guaranteed for the entire term.
And, while CDs may not be the flashiest investment option, they offer several key advantages that can help you achieve your financial goals.
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5 big benefits of a 5-year CD to know now
There are a few big benefits of opening a 5-year CD today, including:
Guaranteed returns
One of the most appealing aspects of a 5-year CD is the guarantee of returns. When you invest in a CD, you lock in a fixed interest rate for the duration of the term, which, in this case, is five years. This predictability can be a major asset in a volatile or unpredictible financial market.
Unlike stocks or other investments that can fluctuate in value, your CD will earn a set amount of interest, providing peace of mind and stability in your financial planning — unless, of course, you withdraw your money before the CD term is complete. In that case, you'll typically pay an early withdrawal penalty equal to some or all of the interest you've earned.
Learn more about how a CD could benefit you here.
Higher interest rates
Compared to traditional savings accounts and many other deposit accounts, CDs tend to offer higher interest rates. This means your money can grow faster over time. And, that's especially true right now, as the Fed's recent rate hikes have led to many financial institutions offering rates of 5% or more on their CDs.
Typically, the longer the term of the CD, the higher the interest rate is likely to be. That isn't necessarily the case right now, though, as the high-rate environment has led to big APYs on CDs of all terms. But it still makes a lot of sense to invest in a 5-year CD instead of a shorter one today. You'll lock in that high rate of interest for five years when you do, so you won't have to worry about rates declining for the full five years.
And, while it's true that you won't have immediate access to your funds without penalties, the trade-off in the form of higher interest can be well worth it, especially if you have a specific savings goal in mind or don't anticipate needing the money in the short term.
Safety and security
CDs are considered one of the safest forms of investment. The funds you deposit into a CD are typically insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit union CDs. This insurance provides a high level of security, making it an attractive option for conservative investors who want to protect their principal.
Plus, there aren't other risks to investing in one. The market fluctuations won't affect your earnings like they would with stocks, and you don't have to worry about losing your money if the market takes a sudden downturn.
Diversification of savings
A well-rounded financial portfolio includes a mix of investments with varying degrees of risk and liquidity. And, a 5-year CD can be a valuable component of this mix, especially if you have a portion of your savings already in more volatile investments.
By diversifying your savings with a 5-year CD, you can balance your portfolio, reduce risk and ensure that a portion of your assets remains stable and easily accessible in the future.
Disciplined saving
A 5-year CD can also serve as a financial discipline tool. When you open a CD, you commit to keeping your money invested for a set term. This prevents impulsive spending and encourages a savings mindset.
And, knowing that you'll incur penalties for early withdrawal can deter you from dipping into your savings prematurely. As a result, you'll be more likely to meet your financial goals and keep your finances on track.
The bottom line
While a 5-year CD might not be the right choice for every investor or savings goal, it offers several significant benefits that should not be underestimated. With guaranteed returns, higher interest rates, safety, diversification and disciplined saving, a 5-year CD can be a valuable addition to your financial toolkit. Whether you're saving for a long-term goal like retirement or simply looking to diversify your investment portfolio, it can be a reliable and stable way to grow your savings over time while providing you with the peace of mind that your money is secure.
