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How risky are certificates of deposit?

What we'll cover

  • What certificates of deposit (CDs) are

  • The benefits and risks of CDs

  • How to best use CDs

Life is all about balancing risks and rewards — especially when it comes to your finances. You want your money to earn interest at the highest rates, but you also want to safeguard your principal..

High-risk investments like some stocks and bonds generally yield higher returns. The trade-off is that you could end up losing money, even your principal. On the other hand, FDIC-insured bank products like savings accounts and certificates of deposit (CDs) have lower returns but may pose significantly less risk for you and your money.

If you’re leaning toward a more conservative approach to earning interest, CDs could be a good place to start. Here’s what you need to know to weigh the risks and rewards of saving with CDs.

What is a CD?

A certificate of deposit is an interest-bearing deposit account in which you agree to keep your initial deposit for a specified time. A CD has a fixed term length and maturity date, which typically can be anywhere from a few months to a few years. At the end of the term, you can withdraw your funds from the CD without penalty.

Are CDs safe?

CDs from FDIC-member banks are insured by the Federal Deposit Insurance Corporation up to the maximum amount allowed by law, which means they are about as safe a place to save as you can get. The FDIC protects the money in deposit accounts — CDs, savings and money market accounts, and checking accounts — against loss if the bank fails.

To get the full protection federal insurance provides, be sure your combined deposits land within federal limits. The FDIC offers an online calculator to help you determine the coverage your deposits qualify for.

CDs from FDIC-member banks are insured by the Federal Deposit Insurance Corporation up to the maximum amount allowed by law, which means they are about as safe a place to save as you can get.

How safe are online CDs?

You can open CDs at traditional brick-and-mortar banks as well as digital banks like Ally Bank . To open an online CD, you will deposit your money digitally. Online CDs are generally just as safe as CDs from a physical bank, provided the institution is federally insured.

Ensure the bank takes precautionary steps to protect your personal information, such as using encryption and multi-factor authentication .

CD laddering

One way to make sure you get the maximum benefit with a minimum certificate of deposit risk is to use a CD laddering strategy. A CD ladder basically spreads your funds over a number of CDs with staggered maturity dates.

With a CD laddering strategy , you take advantage of the best long-term CD rates, have periodic access to your funds (avoiding early withdrawal penalties), and you make sure you get the highest rates offered each time one of your CDs matures. In this way, laddering could be a useful approach to help you reach long-term savings goals.

CD vs. savings account

CDs typically have a higher annual percentage yield (APY) than savings accounts , but they’re more rigid in how you can access your money. You also cannot add money to a CD like you can with a savings account; CDs are purchased in lump sums while savings accounts let you deposit money whenever you want.

While savings accounts usually have variable interest rates, CDs allow you to lock in a fixed interest rate for a set period of time, which means you could keep a great rate even if market rates drop. Keep in mind a fixed rate also means you might be stuck with a lower rate if interest rates rise before your term is up.

Why should you consider opening a CD?

Certificates of deposits come with a lot of benefits that make them an attractive choice for stashing your savings. CDs offer a strong safety profile, the stability of a fixed interest rate, higher APY and the ability to ladder.

CDs also are convenient. You can open them at most banks and credit unions and even online. A variety of types, such as No Penalty CDs , High Yield CDs and Raise Your Rate CDs , also means different options to help you reach your savings goals.

Tip: Online banks often offer better rates than traditional brick-and-mortar banks.

Consider inflation when opening a CD

Leaving your money in any deposit account may mean losing some purchasing power over time if your rate of return doesn’t keep pace with the rate of inflation. But, with some good comparison-shopping skills and an eye on changing rates, you should be able to find CDs — especially long-term CDs — that more than keep up.

Balance solid returns with peace of mind

Before you decide if a CD is right for you, think about when you will need the money, how much you can expect to make and the potential penalties if you need to take the money out early. With the right CD(s) and a good saving strategy, it’s possible to strike a balance between earning interest at competitive rates and protecting your savings against loss.

No matter which CD — or combination of CDs — you choose, you can count on Ally Bank to offer competitive rates and great customer service. Most of our CDs have no minimum deposit required. You also get our Ten-Day Best Rate Guarantee with every CD: When you fund your CD within 10 days of your open date, you’ll get the best rate we offer for your term and balance tier if our rate goes up within that time.

If CDs aren’t the best fit for you right now, we have other ways to help you save. Explore your options with our Online Savings Account and Money Market Account .

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