Can you lose money on CDs?
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
Many CDs have early withdrawal penalties equal to several months of interest. You could lose money in a CD if you withdraw before you've earned enough interest to cover the penalty.
Market Crashes and CDs
Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
A CD investment provides guaranteed returns and your money stays federally insured.
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
It's hard to resist a good deal, and today's high interest rates on short-term TreasurysBX:TMUBMUSD01Y and CDs are luring in even wealthy investors who have financial advisers handling their affairs.
Are CDs safer than Treasury bills?
Security: Both CDs and Treasuries are very high-quality investments. CDs are bank deposits that pay a stated amount of interest for a specified period of time and promise to return your money on a specific date. They are federally insured and issued by banks and savings-and-loans institutions.
Depending on the bank, a $5,000 CD deposit will make around $25 to $275 in interest after one year.
If you're looking for a safe way to earn interest on your savings, a certificate of deposit, or CD, is worth considering. CDs tend to offer higher interest rates than savings accounts. And today's best CD rates are far higher than the national averages.
The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.
Use Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.
On top of that, Blackman points out that even with a high yield, you're not likely to beat inflation with a CD investment. So, while CDs can provide some guaranteed returns over time and some level of security, they're not likely to provide you the returns needed to build wealth for retirement over time.
If you have short-term savings goals, like to help pay for your wedding, a CD is likely the better fit. If you are saving for retirement, an IRA can offer better returns over the long run.
Because of the nature of CDs, once you put the money in, it is stuck there until maturity (unless you want to pay a hefty penalty) and you are stuck with the same interest rate.
Diversification in your asset allocation can reduce risk: Stock investments come with more risk than CDs. However, when you add CDs to the mix, you may be able to reduce risk, increasing your risk-adjusted returns.
Are CDs more risky than stocks?
CDs are low-risk, low-return financial vehicles that are best suited for short-term savings and risk-averse investors. Stocks have higher potential returns and higher potential losses. They are suited to long-term investors who can ride out price fluctuations. Individual stocks vary greatly in their level of risk.
As you can see from the scenario above, choosing to be paid at maturity can sometimes earn you more in interest, because the higher interest rate can offset the value of compounding interest on the monthly option. Plus the longer you stow your money away, the more interest you'll earn.
Unlike most other investments, CDs offer fixed, safe—and generally federally insured—interest rates that can often be higher than the rates paid by many bank accounts. And CD rates are generally higher if you're willing to sock your money away for longer periods.
Because CD rates follow the federal funds rate, CD rates will usually go down during a recession.
Don't: Take On High-Interest Debt
It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand. Chances are your highest-interest debt is credit card debt.
