How Risky Are Certificates of Deposit?

Understanding CD Risk

October 2012

When you're talking about financial products, "risk" essentially means that you might lose money or miss opportunities to make money.

Certificates of Deposit (CDs) are considered low-risk-but they aren't risk-free, according to Robert Schmansky, an independent certified financial planner in Royal Oak, Michigan. "It comes down to interest-rate risk. If rates go up, you could still be locked into the lower rate," he recently told Ally Bank. However, you're typically not in danger of losing your principal or any earned interest with a CD from banks like Ally Bank, where deposits are insured by the FDIC up to the maximum amount allowed by law.

One way to make sure you always have the opportunity to benefit from rising CD rates is a concept called "laddering," which basically spreads your funds over a number of CDs with staggered maturity dates.

With a CD ladder, according to Schmansky, "You guarantee that a part of your money is always coming due. You take advantage of longer-term CD rates, while always knowing that some portion of the savings will be available within a given time period," he said. Those available funds can be reinvested to take advantage of any increasing rates.

Penalties for early withdrawal also are a form of CD risk, so it's important to consider the length of time you can afford to put money away - or put your money in the Ally Bank No Penalty CD, which offers a competitive, 11-month rate in a CD which you can withdraw - including earned interest - without a penalty anytime after the first 6 days following the date you fund your CD.

"That's really the issue-knowing what your cash needs are going to be, not just what you hope they are going to be," said Ted George, president of George Financial Advisors in Scott's Valley, California, in a recent discussion with Ally Bank. "Penalties vary, so you should consider CDs with relatively low ones."

Finally, make sure that you are within the legal limits of insurance from the Federal Deposit Insurance Corporation (FDIC), which only insures deposits in CDs offered by FDIC-member banks. "You invest in CDs to provide safety, so you want to make sure that you aren't going over any limits and removing some of that safety," Schmansky pointed out. The FDIC offers an online calculator to help determine such coverage (https://www.fdic.gov/edie/index.html).

Learn about the Ally Bank line of CDs at Allybank.com or call live, 24/7 customer service at 877-247-ALLY (2559).

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