A certificate of deposit is an extremely safe financial instrument designed to provide a higher yield than traditional savings accounts. CD’s can be an attractive savings alternative if the account holder does not need immediate access to the funds.

Understanding CD’s

Unlike stocks, bonds, and mutual funds, CD’s are not subject to daily market fluctuations.  They provide a reliable and predictable flow of interest income over the life of the CD. Credit Union members can purchase CD’s in nearly any denomination over a variety of time periods.  The interest rates that are offered on CD’s are determined by a number of factors, including the prevailing federal funds rate, the amount of the deposit, and the term of the CD.

Since higher rates of interest are paid on CD’s, account holders should understand that their money will be unavailable for withdrawal without penalty throughout the entire investment period. CD terms can vary from 3 months to 5 years or more, and early withdrawal can result in substantial penalties. Upon completion of the term, the depositor will see their entire principal returned in full.

CD Strategies

Since CD’s usually pay interest on a monthly basis, they remain a preferred investment tool for retirees looking to receive a predictable income. To address the potential for inflation, which can rob a CD of earnings value, many depositors choose a “laddering” strategy, where they purchase a variety of CD’s with different maturity dates. This helps smooth out the variations in interest rates since expiring CD’s are continually reinvested.

Safety

In addition to paying higher interest rates than savings or money market accounts, CD’s do not have the volatility of stocks, bonds, or mutual funds. For every CD, the National Credit Union Administration (NCUA) insures Wayne Westland Federal Credit Union members up to $250,000 per account holder.

Other Considerations

It is important to understand the rules and restrictions prior to investing in a certificate of deposit. Particularly with issues relating to maturities and tax consequences, investors are encouraged to seek further information from a member service representative at the Credit Union.

A certificate of deposit is a stress-free investment vehicle that will provide a superior rate of return.