Certificates of deposit (CDs) can be an attractive investment option, offering many benefits such as fixed returns and higher interest rates than traditional savings accounts. However, there are a few potential downsides and it's essential to understand them fully before diving in.
Read on to learn more as we explore the pros and cons of certificates of deposit and help you determine if they align with your financial goals.
ADVANTAGES AND DISADVANTAGES OF CDs
Learning about the general advantages and disadvantages of certificates of deposit will lay a solid foundation for making informed investment decisions.
ADVANTAGES
- Guaranteed Returns—CDs offer fixed interest rates, ensuring a guaranteed return on investment.
- Low Risk—They’re insured by the National Credit Union Administration (NCUA) when held at a credit union or the Federal Deposit Insurance Corporation (FDIC) when held at a bank, making them a low-risk investment option.
- Variety of Terms—You can select from various terms, ranging from a few months to several years, depending on your financial goals.
DISADVANTAGES
- Limited Liquidity—You cannot access your funds before the maturity date without incurring penalties.
- Lower Returns Compared to Other Investments—CD interest rates are generally lower than returns from stocks or bonds.
- Inflation Risk—The value of your investment may not keep up with inflation over time.
DIFFERENT TYPES OF CERTIFICATES AND THEIR PROS AND CONS
Not all CDs are created equal—there are several different types, each with their respective advantages and disadvantages:
INDIVIDUAL RETIREMENT ACCOUNT CERTIFICATES
Individual retirement account (IRA) certificates operate like traditional CDs but are held within an Individual Retirement Account. You can open an IRA Certificate with as little as $500. Educational IRA Certificates are specially designed to save specifically for your children's future education.
Pros: Tax advantages; useful for long-term retirement or education savings
Cons: Subject to IRA contribution limits and early withdrawal penalties
FLEX CERTIFICATES
Flex certificates are flexible saving tools that require only a $50 initial deposit. You can make deposits anytime (up to $100,000) and are allowed to make withdrawals during the first three business days of each quarter (January, April, July, and October).
Pros: Low initial deposit, flexibility in adding funds, higher interest rates than savings or money market accounts, and the opportunity to establish saving habits
Cons: Limited withdrawal opportunities and rates may be lower than traditional CDs
DEDICATED SAVER CERTIFICATES
Dedicated saver certificates allow you to save for pre-planned expenses through direct deposits. You can choose terms ranging from 3 to 60 months and must start with a minimum deposit of $10 per month.
One manual transfer of a maximum of $10,000 per month is allowed. The account features higher interest rates based on current certificate rates and requires automatic transfers or payroll deductions.
Pros: Convenient for goal-based saving, flexible terms, higher interest rates, and automatic saving through payroll deduction.
Cons: Requires consistent monthly deposits and limited manual transfers.
WHEN IS A CERTIFICATE OF DEPOSIT A GOOD INVESTMENT?
Opening a CD is an excellent option for individuals with a specific savings goal who don’t need immediate access to their funds. Certificates of deposit are ideal for a wide range of investments, including:
Saving for a House—If you live in Utah and are eligible to join Wasatch Peaks Credit Union, opening a CD could be an excellent way to save for a down payment on a house in Salt Lake City or Provo.
Planning a Getaway Vacation—Save for a vacation getaway from SLC to the picturesque landscapes of Moab, Park City, or Yellowstone National Park.
Saving for Education—Open an educational IRA certificate to save for your child’s future education expenses at local institutions such as the University of Utah or Brigham Young University.
ALTERNATIVES TO CERTIFICATES OF DEPOSIT
While CDs can be a solid choice for saving, it’s important to explore alternatives that may align better with your financial goals and needs. Here are a few other options to consider:
MONEY MARKET ACCOUNTS
Money market accounts (MMAs) often offer a higher interest rate than traditional savings accounts and they typically allow for limited check-writing and debit transactions.
Pros: Higher interest rates compared to traditional savings accounts, more liquidity than CDs, and insured by the NCUA or FDIC
Cons: Usually require a higher minimum balance and a limited number of monthly transactions
IRAs (NOT IN CD FORM)
You can invest IRAs in various assets including stocks, bonds, and mutual funds—not just CDs.
Pros: Potential for higher returns and tax advantages
Cons: Subject to contribution limits, the potential for greater risk depending on investment choices, and penalties for early withdrawal
REGULAR SAVINGS ACCOUNTS
Regular savings accounts are the simplest form of savings, whereby you deposit money and earn interest.
Pros: Highly liquid, no term commitment, NCUA or FDIC insured
Cons: Typically lower interest rates, no tax benefits
WHICH CD IS RIGHT FOR YOUR FINANCIAL FUTURE?
Certificates of deposit options are as varied as the financial goals they can help achieve. Whether it’s building a nest egg, saving for a child's education at the University of Utah, or planning a dream vacation—Wasatch Peaks Credit Union has a CD tailored to your needs.
Click below to learn how easy it is to open a CD at Wasatch Peaks.
