Certificates of deposits (or CDs) are making a comeback, with high rates meant to help you make more on your money. If you think a CD might be the right choice for your savings strategy and style, read on to learn more!

What are CDs?

Guaranteed interest. The main purpose of a CD is to allow you to place cash in a short-term investment that gives you guaranteed interest. In most cases, the return on CDs is higher than what you get with savings accounts and most treasuries, making it a better place to park cash.

Low risk. CDs are generally considered to be low-risk investments. When you invest in a CD at a credit union, your funds are federally insured by the NCUA to at least $250,000 and your rate is guaranteed. Essentially, you are giving your credit union a loan. It works pretty much the same as it does when you borrow money, but in reverse.

How they work. In this case, you give your credit union a specific amount of money. You agree to allow them to keep your money for a specific amount of time, known as the “term.” In return, they pay you a specified amount of interest on the money. While CD terms can be for any length of time, common term lengths for CDs are:

• 6 months
• 12 months
• 18 months
• 60 months

Financially speaking, the longer the term of the CD, the higher the interest rate and the more money you stand to earn. Keep in mind that unless you are willing to pay a penalty, your cash is locked up for the duration of that term.

CD laddering. You have the ability to optimize your earnings by laddering your CDs. Instead of investing all your funds in one CD, you disperse it in multiple CDs with different maturity dates. This allows you to take advantage of higher rates while still having cash available as each CD matures.

When to Use CDs

Safeguarding savings. Some people want to protect their savings, even from themselves. CDs offer an outstanding opportunity to accomplish this. They’re a great option when you’re saving to reach your financial goals, like the down payment on a house.

Periods of instability. Let's face it: the stock market is not always the safest place to keep your funds. While stocks may offer the best return over the long-term, during the short-term, you might expect to take some losses. CDs provide a useful avenue to protect your portfolio while still offering a modest return.

Growing short-term wealth. Short-term CDs are a good idea if you’re looking to invest but either have no immediate investment in mind or you need more cash for the investment you’re planning. That can include things like saving to start a business, buying an investment property and more.

Approaching that magical year. Some invest aggressively when younger and transition to safer investments as they approach retirement age. This works well with CDs. They’re as close to “no risk” as you can get with investments.

Are CDs for You?

Something to keep in mind with CDs is that you’re not only investing funds, but time as well.

A CD is not the most liquid of your investment options since you promise your credit union access to your money for a specific period of time. That means you won’t have access to those funds until the term expires.

A strategy to minimize this drawback is to create a "CD ladder" to spread out your term lengths, giving you access to some of the funds as each term expires.

Another drawback to consider is that the return might be lower than other investment options. That is the price you pay for the low-risk nature of CDs as investments.

What is the takeaway? With the right strategy in place, CDs can be sound investments and with rising rates, now might be the perfect time to invest.

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