6 Crucial Pros and Cons of Certificate of Deposit

6 Crucial Pros and Cons of Certificate of Deposit

by / Comments Off / 907 View / Apr 12, 2015

If you are interested in investing the money you have, then there are any number of options available to you. Some of these options include investing in the stock market, investing in rare earth metals, and even investing in antiques or trading cards. What ties all of these things together is the risk of losing your money and the potential to make a lot of money from them.

As a result of this thinking, it is easy to see all investments as a juggling of risk and reward. The greater your risk, the greater your reward, and vise versa. Certificates of deposit are available for those looking to limit the amount of risk they have while still making some money from their investment.

A certificate of deposit is most commonly offered by banks and credit unions as a kind of savings account. Backed by the National Credit Union Administration and the Federal Deposit Insurance Company, certificate of deposit allow you a higher level of interest on what you deposit but deny you access to the money for a limited amount of time. Lets take a moment to review the pros and cons associated with this investment and financial instrument.

The Pros Of A Certificate of Deposit

1. Among The Lowest Levels of Risk
A certificate of deposit is one of the least risky forms of investing currently in existence. Being backed by large governmental institutions and a system of checks and balances, a certificate of deposit will guarantee a predictable outcome that you as an investor can rely on. While the stock market may crash and people lose their fortunes on riskier investments, you can make a great deal of money by investing with the long term in mind. That is why a certificate of deposit is often associated with long term retirement funding.

2. Higher Interest Rates
Lets be serious, any investment done through local banks or credit unions will have low returns on investments. That is because risk is also so low. However, among the variety of investment tools available through these organizations, a certificate of deposit offers among the best possible returns. In addition, the interest rates are normally higher for individuals then they are for companies, making them perfect for individual investors. In addition, the longer the period of time is that the institution holds onto your money, the greater your return will be.

3. A Good Way To Put Money Aside And Not Access It
If you have trouble saving money, then a certificate of deposit is perfect. It allows you to put aside money in such a way that it will be hard for you to access. By using a certificate of deposit, you can store away money to use later and curb the impulse to spend it all instead.

4. Wide Number of Options And Types Available
Several different kinds of certificate of deposits exist for you to choose from depending on the bank or credit union you go with. In addition, you can normally select the amount you want to put in as well as the length of time your money will be held for. The more money and the longer you do this, the greater your return will be.

The Cons of A Certificate of Deposit

1. No Access To The Money Without Fees
The greatest reason not to have a certificate of deposit is because you will have no access to it until the pre-arranged time period is up. If you have an emergency for example, then accessing the money may cost you a great deal in fees. In addition, if a better investment opportunity comes up, then you will be unable to reinvest your money without losing out right at the beginning. For those who like to hold their money in one place and leave it be, a certificate of deposit is perfect. For the larger group of individuals that like to spend and move their money around, a certificate of deposit is the worst kind of investment.

2. Risk Of Inflation
Having a certificate of deposit means being at risk with inflation. Because certificate of deposits have a slow rate of interest related growth, a sudden increase in inflation may mean that you either make no additional money or lose out on your investment. The interest rate associated with a certificate of deposit is normally fixed, meaning that you will be locked in until the terms of the agreement have been met. With a sudden increase in inflation, you may render years of effort wasted. While definitely a safer bet then other financial tools out there, a certificate of deposit may come to bite you in the but if the markets turn in the wrong direction.