The drawbacks are that it suffers from reinvestment risk -- the risk that future CD rates will be lower than what you can get today -- and is not a tax-efficient way to grow your capital unless you build it in a tax-advantaged account such as an IRA.
Cons: CDs are fragile. Once scratched, the data may be lost forever. They are easy to pirate and pirates can easily make copies of the data present on the CD. Data once burnt is permanent, if you upload something accidentally and want to remove it, there is no option but to purchase a new CD.
From mid-2023 to September 2024, many banks offered attractive certificate of deposit (CD) rates of around 5%. But now that the Federal Reserve has been cutting rates, CD yields are dropping too. Despite lower rates, CDs remain a solid option for growing your savings.
Another drawback of CDs is the opportunity cost of tying up your funds in a fixed-rate investment. If interest rates rise during the term of your CD, you may miss out on the opportunity to earn a higher return on your savings.
CDs are one option that can help protect your investment from times of turmoil by providing stable income. The returns gained from these investments usually won't be as high as those provided by stocks but they can serve as a cushion to balance your portfolio and keep it afloat when the market is down in the dumps.
In rare cases, you could lose money or value if you've: Placed more than $250,000 in a CD or account combination at an insured institution that fails. Invested with an uninsured brokered CD account, or an unusual CD type. Opened a CD when rates are rising or inflation is rising.
You can earn hundreds of dollars or more
If you open a 2-year CD with a rate of 4.20%, for example, you'll earn approximately $483 on your $5,000 deposit. If you keep the money in longer, you'll make even more. A $5,000 5-year CD at 4.35% will leave you with a profit of around $1,187.
If you put $500 in a CD for five years, how much would you make? This depends on the CD rate. A five-year CD at a competitive online bank could have a rate of 4.00% APY, which would earn around $108 in interest in five years. A five-year CD with a 1% rate would earn about $26.
Interest earned on CDs is considered taxable income by the IRS , regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
In humans, Cd exposure can result in a variety of adverse effects, such as renal and hepatic dysfunction, pulmonary edema, testicular damage, osteomalacia, and damage to the adrenals and hemopoietic system [14].
The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.
Is It Good to Invest in CDs? CDs can be a good place to save money that you don't plan to spend right away if you're interested in a safe way to earn interest. Keeping all of your money in CDs, however, could mean missing out on the chance to earn higher returns elsewhere.
As Beene notes, "The recent rate cuts by the Fed have already produced small drops in the rates of CD and savings accounts at many major banks, and we're going to see that continue if interest rates drop. If you want to lock in a certain rate a CD currently provides, it would be a good idea not to wait."
$3,000 X 12 months = $36,000 per year. $36,000 / 6% dividend yield = $600,000. On the other hand, if you're more risk-averse and prefer a portfolio yielding 2%, you'd need to invest $1.8 million to reach the $3,000 per month target: $3,000 X 12 months = $36,000 per year.
Deposits at FDIC-insured banks are covered up to $250,000 per person per account ownership type. For example, a $250,000 certificate of deposit in a single-owner account would be fully insured in the event of a bank failure or liquidation.
Online music piracy began CDs' decline. Piracy was solved by music streaming services, a legitimate channel to the abundance of music digital methods allowed. In the wake of digital music services, physical music has seen a resurgence as more of an aesthetic and collectors purchase.
There's always a catch. If you cash out your CD before it matures, you'll face a penalty—and it could cost you months or even years of interest that's been building up in your account.
The cons of CDs
With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty. Another disadvantage is that CD interest rates can sometimes struggle to keep up with inflation. When inflation rises, the value of your dollar goes down.
How much interest would you earn? If you put $20,000 into a 5-year CD with an interest rate of 4.60%, you'd end the 5-year CD term with $5,043.12 in interest, for a total balance of $25,043.12. Not all CDs offer that interest rate, though.
Like IRAs and 529 plans, there are a variety of investments you can buy within an HSA, and your options depend on the financial institution that holds your account. If you invest in CDs within your HSA, you can avoid paying taxes on the interest, provided you use distributions to pay for qualifying expenses.