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How Risky Are Certificates of Deposit?

Understanding CD Risk

When you're talking about financial products, "risk" essentially means that you might lose money or simply miss opportunities to make money. With that in mind, 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. He explains, "It comes down to interest-rate risk. If rates go up, you could still be locked into the lower rate." 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 laddering strategy, you can maximize your earnings while still getting periodic access to your money.

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. You can also choose a CD that does not have an early withdrawal penalty. The Ally Bank No Penalty CD allows you to withdraw all your money, including interest earned, without any penalty, any time after the first six days following the date you fund your account. Ted George, president of George Financial Advisors in Scott’s Valley, California, suggests looking closely at withdrawal penalties: “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 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," explains Schmansky. The FDIC offers an online calculator to help determine such coverage (https://www.fdic.gov/edie/index.html).

Whether you're interested in our High Yield CD, No Penalty CD or Raise Your Rate CD, you’ll get rates that are among the most competitive in the country and customer service that makes banking as simple as possible. Learn more at Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559) today.