How to Use CDs in an Uncertain Economy How to Use CDs in an Uncertain Economy
Wondering how to grow your savings in times of economic uncertainty? If you're worried about market factors like inflation, dips in the stock market, or interest rate fluctuations, you're probably looking for a savings solution that provides stability and guaranteed return on investment.
The good news is that Certificate of Deposit, or CD, accounts offer exactly this kind of investment option. Below, we'll dive into what makes CDs a good savings option during times of economic uncertainty.
What Are CDs and How Do They Work?
A CD is an interest-bearing deposit account that comes with a fixed interest rate for a set term. Further, a CD is a bank deposit like a checking or savings account, and thus eligible for FDIC insurance coverage.
When you open a CD you'll choose a term, usually anywhere from a month to five years, and will receive a corresponding interest rate. With a fixed rate, your rate will be locked in for the entire account term, meaning it won't rise or fall with market fluctuations. CD rates are generally higher than those of traditional savings accounts, in part because with CDs you're required to leave your funds untouched for the duration of the account term – if you seek to terminate your CD before maturity, then you will usually be required to pay an early withdrawal penalty which can reduce your final return. Otherwise, CDs work like other deposit accounts -- you'll receive monthly or quarterly statements and compounded interest payments added directly to your account balance.
Why Are Certificates of Deposit Good Investments During Economic Uncertainty?
If you time your account opening correctly, CDs are insulated from economic downturns and market volatility for multiple reasons. First , because they have fixed interest rates, CDs are low-risk investments and offer guaranteed stability and rate of return. Once you lock in your interest rate, upturns or downturns in the market will not change your rate of return. The positive side of this is that if the interest rates go down after you open a CD account, your CD rate won't go down. However, if interest rates rise after you open a CD, your rate will remain the same. However, the ultimate upside of using CDs to grow your savings during economic uncertainty is protection against future interest rate reductions. Unlike a 401(k) or stocks, funds put into a CD will be insulated from potential market downturns.
Second, CDs generally come with higher interest rates than traditional savings accounts. This means that whatever happens with the stock market or interest rates, you'll be earning more on your hard-earned savings than you would if you left it in your standard savings account. The higher rates that come with CDs are the tradeoff for being unable to access your funds until your CD matures (unless you're willing to accept an early-withdrawal penalty).
What is the Best CD Option for Times of Economic Uncertainty?
The first thing to consider if you are looking to open a CD account to protect your savings during times of economic uncertainty is your own savings goals and financial needs. If you want to make sure you have access to your savings in the not-too-distant future, you'll likely want to consider a short-term CD. If you're more comfortable putting your money away for a longer period of time in exchange for a higher interest rate, a long-term CD might be a good option to consider.
Many financial institutions will offer special or promotional CDs with special terms of limited-time rates. For instance, Leader Bank currently has two exclusive high-yield CD offers with six- and nine-month terms that are perfect for growing your savings with a higher interest rate while avoiding tying your funds up for an extended period of time.
What is a CD Ladder?
A CD ladder is a savings strategy that can be beneficial during times of economic uncertainty because it allows you to take advantage of the higher interest rates associated with CDs while also maintaining some liquidity with your funds. CD ladders involve opening a mix of long-term CD and short-term CDs. When one of the short-term CDs in your ladder matures, you have the flexibility to renew the account, reinvest the funds into another CD and continue your ladder, reinvest the funds into a different type of account, or withdraw them and use them to achieve a savings goal.
What does a CD ladder look like in practice? The example below supposes you have $5,000 invest in a five-year CD ladder with accounts maturing at different intervals:
- $1,000 in one-year CD
- $1,000 in a two-year CD
- $1,000 in a three-year CD
- $1,000 in a four-year CD
- $1,000 in a five-year CD
After the CD with the shortest term matures (in this case the one-year CD), you reinvest your initial investment plus the interest it has accrued into a new five-year CD, and so on for each year as each CD matures. By following this strategy, you'll have a CD maturing every year. By spreading out your initial investment into accounts with different terms, you'll minimize the risk of locking in your money for a long period of time. During uncertain economic times, this flexibility can be invaluable.
How to Get Started Saving With a CD
Opening a Certificate of Deposit with Leader Bank takes only a few minutes and can be done online from anywhere! Leader Bank also offers a range of flexible short and long-term CDs including several high-yield six- and nine-month CDs.
