Opening a CD Account: Pros & Cons
Are you considering opening a CD Account? An FDIC-insured Certificate of Deposit, or CD Account, is a type of savings account with a fixed interest rate, a fixed term length, and a fixed date of withdrawal known as the maturity date.
A CD with a good rate can play an important role in your overall savings plan. Investing in a certificate of deposit isn’t a quick way to grow wealth, but it does offer a guaranteed return and without the risk of losing money. If you’re looking for a place to store funds for a specific period of time and you value peace of mind, a CD could be worth considering.
What’s the difference between a CD and a traditional savings account?
Unlike a savings account, you won’t be able to continually add money to a CD. You put down a set amount up front and don’t typically add to or deduct from it until the CD’s term ends (penalties accompany early withdrawal). Savings account interest rates fluctuate with the market, whereas a CD’s rate stays constant for the term. For example, if you open a 1 year CD at a 1.00% interest rate and 1.00% Annual Percentage Yield (APY), you will earn that one percent for the whole year.
Pros of a CD Account
Safety is a key advantage of a CD account. Opening a CD account is a more conservative investment than stocks and bonds with a non-volatile guaranteed rate of return.
CD accounts, on average, offer better returns than a savings account. Because CD account holders can’t take their money back at a moment’s notice like savings account holders can, CDs are more valuable to banks than savings deposits. Banks typically pay CD investors a higher yield in exchange for “locking” up their money for a set amount of time. This is dependent on rates and consumers should do their own research before choosing a CD account. Piscataqua Savings Bank’s current rates are available online here.
Fixed, predictable returns are another advantage of a CD account. With a guaranteed rate of return, it’s possible to calculate how much interest on your principal you could earn by the time your CD reaches maturity.
Cons of a CD Account
The main trade-off of a CD account is that in exchange for a typically higher than average interest rate, you agree to essentially not touch those funds until the end of the agreed term. If a need arises or your financial circumstances change, you may need the funds in your CD account earlier than expected. Withdrawing the principal before a CD has matured could result in a penalty.
Secondly, while the yields tied to CDs are more predictable and generally more favorable than they are for other more liquid financial accounts, returns are typically lower than they are for other higher-risk options such as stocks.
Opening a CD Account at Piscataqua Savings Bank
At Piscataqua Savings Bank, we offer terms from 3 months to 5 years with very competitive rates and low minimum balance requirements. You can receive statements monthly, quarterly, annually or combine them with your monthly checking account statement. Interest is compounded and can be withdrawn or automatically transferred into your checking account at any time without penalty.
Interested in opening an account at Piscataqua Savings Bank? You can open a checking, savings, money market, or CD online, or call us at (603) 436-5250 with any questions, or simply stop in and see us. As always, we’re happy to help!
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This blog is for informational purposes only; not legal, financial, or other advice, warranty, etc.