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Saving for the future is an important part of any financial plan. A certificate of deposit (CD) can be a relatively safe way to grow your money with a predictable fixed rate of return over the length of your selected term.
When you put money into a CD, you’re committing to save those funds until it reaches its maturity date. In the meantime, you’re earning a consistent rate of interest on your deposit. Also, the interest you’d earn on a CD is generally higher than what you’d earn from a standard savings or high-interest checking account.
But with so many options available to construct your financial plan, where do CDs fit into the picture?
A CD may be well suited for several savings goals in situations where you have a long-term savings target and don’t anticipate needing the money in the immediate future. For example, if buying a home is a personal goal, a CD could prove more appealing than a traditional savings account for your down payment if it offers a higher annual percentage yield (APY). You might also opt for a CD if you’re saving for a dream vacation or you already own a home and you plan to tackle some renovations down the line.
A key factor to keep in mind is liquidity. Breaking into a CD before its maturity date typically results in paying an early withdrawal penalty. For that reason, a regular savings account could be the better choice for an emergency fund or similar savings goals since you can tap into them at a moment’s notice. One way to avoid not having access to all CD funds may be to create a CD ladder, consisting of multiple CDs with staggered maturity dates so you have opportunities to use the funds without penalty.
If you’re already contributing to an employer’s retirement plan, you could consider an IRA CD to supplement your savings. IRA CDs observe the same rules as Traditional or Roth IRAs with regard to contribution limits and tax benefits. In 2017 you could save up to $5,500 in an IRA CD, or $6,500 if you’re 50 or older.
Your IRA CD would earn a set interest rate just like any other CD, and IRA CDs are also FDIC-insured for up to $250,000.
This approach may be more appealing to someone who prefers a more conservative approach to saving for retirement. CDs are among the safest ways to grow your money, which can be reassuring if you’re concerned about potential losses you could see with other savings options.
CDs can be helpful when working toward financial goals, both large and small. Evaluating the savings goals you hope to accomplish, knowing your savings timeframe, and knowing the level of growth you’d like to generate can help you determine whether a CD makes sense for your financial goals.
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