The roaring eighties and nineties gave certificates of deposit (CDs) an undeserved reputation as a safe but rather dull place to keep excess cash. High inflation, soaring interest rates, a looming recession, and an uncertain stock market have changed all that. Read on to find out why CDs are having a moment—and why you need to be part of it.
SAFE HAVEN: WHY CDS MAKE SENSE NOW
Saving can be hard, especially if you’re just setting out on your financial journey. If you’re a northern Utahn dreaming of owning a house, starting a family, or buying a new car, you know that turning monthly savings into a nest egg you can actually use is difficult, especially when times are as tough as they are now.
Certificates of deposit tend to go unnoticed by many credit union members, partly because putting precious savings temporarily out of reach can seem scary. But it’s mainly because years of rock bottom interest rates have made the returns on these fixed-rate, fixed-term investments appear low compared with what looked like much bigger stock market returns.
However, it might be time to rethink your view of CDs as a place to grow your savings. Modern CD savings accounts offer security, predictability, and guaranteed returns at a time when inflation and slowing economic growth mean investments, retirement accounts, and even cash itself can stagnate or even lose value.
Here we take a look at what CDs are, how they work, and some of the major advantages (and potential disadvantages) they offer. We’ll also consider some innovative products from Wasatch Peaks Credit Union that add flexibility and functionality to this tried-and-true savings standby. Read on to learn more about why CDs make sense right now.
WHAT IS A CD?
A certificate of deposit allows you to earn interest on money by investing it for a fixed period of time in a special type of savings account. Most banks and credit unions offer CDs and provide a no-risk return on investment on the money you set aside.
HOW DO CDS WORK?
A certificate of deposit account lets you invest money you do not currently need access to for a predetermined period (or term) of anywhere between three months to five years. In return, you are paid interest as a fixed dividend at predetermined intervals, typically monthly. Dividends are usually reinvested until the certificate matures. The compounded interest you earn over time is known as your yield, usually referred to as an annual percentage yield (APY).
WHAT MAKES CDS GREAT?
CDs are great because they provide a safe, structured way to increase your savings so you can plan ahead for the things that add value to your life. They’re a smart part of a savings portfolio at any stage of life, but they are particularly important when times are uncertain. Here’s why:
CDs offer safety and certainty when economic growth slows, the stock market stalls, and job losses increase. At times like these, earnings on stock market investments, retirement accounts, and college savings accounts can slow.
Money invested in a CD continues to earn the same fixed rate every month. If you invest when rates are high, you could earn the same APY for up to five years, even as actual interest rates are cut down.
CDs also offer protection from high inflation, which often precedes a recession and can last for some time. Inflation is the loss of spending power over time. It means higher prices for goods and services make each dollar in your pocket worth less each month.
Money in a CD continues to grow as dividends paid at the guaranteed rate are reinvested. This helps to hedge or offset the loss of value that inflation brings. This is especially helpful if, as is currently happening, high-interest rates coincide with persistently high inflation. In this circumstance, CDs protect the value of your money in a way that other investments or even simple cash cannot.
Certificate of deposit’s rock-solid reputation for safety, reliability, and predictability is based on the fact that money deposited in a CD is guaranteed by the federal government in the same way funds in your regular checking and savings accounts are.
Funds invested in CDs offered by credit unions like Wasatch Peaks are fully guaranteed up to $250,000 per account by the NCUA. This means both your original investment and the interest you earn are safe, even if the bank or credit union fails. Therefore, NCUA insurance means no credit union investor has ever lost a cent as a result of an institutional failure.
As a result, CDs offer investors exposure to higher interest rates with guaranteed returns and virtually no risk at all of loss of capital.
HIGHER INTEREST RATES
All that belt-and-braces security comes with higher interest fixed rates than you will earn on most savings accounts and even many money market accounts. That’s good news at any time, but great news at present, when interest rates are widely expected to have peaked. Therefore it’s a perfect time to lock in rates that will outperform many other riskier investments.
For some savers, the thought of being unable to access money for a set period can be intimidating. But many others find the fixed-rate, fixed-term structure of a CD provides just what they need to build starter savings into a tidy nest egg. You’ll need to plan your budget carefully, but you will be surprised how hard your money works when you leave it alone!
Today’s targeted CDs are also not your grandfather’s dusty certificates of deposit. Wasatch Peaks Credit Union is among the innovative banks and credit unions offering CDs that meet your needs with versatile features that make it easier than ever to open an account and grow your money.
At Wasatch Peaks, we offer our members a range of flexible and easy-to-use products, designed to meet specific savings needs. You can open a regular CD with a deposit of as little as $500 and terms of up to 60 months.
In addition, we also offer our members tailored products for specific savings needs:
Flex Certificates allow early-stage savers to start contributing to a CD with:
- An initial deposit of just $50
- One-year term
- Further deposits up to $10,000/month and $100,000/year, as and when you can
- APYs higher than a money market or regular savings account
- Access to your money during a withdrawal window at the start of each quarter
Flex certificates are designed to help you build good savings habits while enjoying great growth potential, predictability, and security. It’s a great way to get a foot on the savings ladder.
Dedicated Saver Certificates are designed for those looking to plan to meet a specific expense, with:
- Initial minimum deposits as low as $10
- A required scheduled transfer from a checking account of payroll
- One voluntary deposit transfer a month
With a choice of terms and rates higher than a money market account, a Dedicated Saver Certificate is a sensible way to plan for holiday spending, an upcoming vacation, or a special graduation gift.
IRA Certificates offer the security and guaranteed returns of a CD along with the benefits of an individual retirement account. Get the jump on retirement saving now and enjoy increasing rewards over time.
- Start an account with as little as $500
- Contribute up to $6,500 a year from your income ($7,500 if you are over 50)
- Make both post-tax (Roth) and pre-tax contributions
- Enjoy tax-free earnings growth
Educational IRA Certificates allow you to build toward a great education for your child while protecting your investment from loss. And you can invest in higher-rate products as your education nest egg increases.
- Family members can contribute up to $2,000 a year from post-tax income
- Enjoy tax-free withdrawals for eligible education expenses including tuition, equipment, meals, housing, and more
PROS AND CONS OF CDS
CDs are an important part of your savings portfolio but need to be used right to maximize their potential. The following table lists the major advantages and potential disadvantages of CDs.
Advantages and Disadvantages of Certificates of Deposit
|CD Advantages||CD Disadvantages|
|Higher, locked-in interest rates||Limited liquidity during certificate term|
|Predictable, guaranteed returns||Locked in lower APY if interests rise|
|Earnings and principal guaranteed||Potential loss of value to high inflation|
|Potential inflation hedge||Lower returns than the stock market|
WHEN IS A GOOD TIME TO OPEN A CD?
CDs are an important part of anyone’s savings journey, and offer a valuable stepping stone that allows you to turn your day-to-day savings safely into a valuable nest egg or lifeline investment asset.
That said, the liquidity requirements of CDs (the fact that you cannot easily access your money for the full term of the certificate you choose) means these accounts are usually most useful for savers who have a monthly budget in place and are saving with a particular goal and timeline in mind.
Let’s look at three scenarios where opening a Wasatch Peaks CD can make a lot of sense:
Wasatch Peaks’ Flex Certificates offer a valuable “piggy bank” for early-stage savers who would not normally consider a CD. With an opening deposit of just $50 and the ability to contribute any amount as often as you like—plus the ability to take funds out periodically—it’s a great way to make structured savings part of your monthly routine.
Best of all, with a term of just one year, you’ll see results soon and will be able to decide whether to take the next step on the CD ladder. It’s also a great way to teach kids about the value of savings and the satisfaction of splashing out after reaching a financial goal!
SAVINGS WITH A GOAL
You’re out on your own, making your budget, and building an emergency fund, but it feels like your necessities are eating up every last cent you have. Financial dreams start small and grow fast with consistent saving. Pick a goal, like an overseas vacation or a white-water rafting trip, put a date on it, and start saving up by using Wasatch Peaks’ Dedicated Saver Certificate.
Choose a timeline of up to 60 months, commit to a monthly automatic contribution of as little as $10, and add to it whenever you have extra funds. You’ll be packing your bags or zipping up your life vest before you know it.
CLIMBING THE LADDER
If you’ve built a small or not-so-small nest egg that you’re ready to build into real long-term wealth, then consider the CD saving ladder approach. Invest in one or more CDs with staggered maturity dates. Then when a certificate matures you’ll have guaranteed earnings that you can use to cover regular expenses or choose to reinvest in another certificate.
If you time your maturity dates right, you’ll regularly receive additional earnings to spend or reinvest. If you consistently invest your earnings in longer-dated certificates, the effects of compound interest mean you will steadily earn more dividends. You’ll grow a tidy sum into real wealth with almost no risk to your principal.
SAVING FOR THE FUTURE
Plan for the future with an IRA or Educational IRA account. Your money is particularly valuable if you start early because your savings will have longer to grow. Open a traditional or Roth IRA account and contribute up to $6,500 from your earnings each year ($7,5000 if over age 50).
You can withdraw your savings for qualified needs at the end of each certificate term (3-60 months) or choose to reinvest them. Qualified uses include certain home purchases, educational needs, and medical expenses. You will need to pay tax on pre-tax contributions to a traditional IRA account.
Whatever your saving needs are, it’s never a bad time to take advantage of the guaranteed returns and fully insured deposits offered by CD accounts. Locking in high CD returns at a time when interest rates allow you to build a hedge against inflation for your money and grow your savings with almost no risk is a smart move.
AIM HIGH WITH A WASATCH PEAKS CD
The gap between your money dreams and your day-to-day financial reality can seem impossibly wide. To help Wasatch Peaks members get where they want to go, we offer a range of traditional and specially tailored certificate products designed to provide the security, predictability, and higher interest you need to supercharge your savings.
With opening deposits as small as $10, structured savings plans, and a wide range of regular and special term products—we’re ready to help you make a plan to turn savings into real wealth. Give us a call, come into one of your local branches, or click below to learn more about opening a CD account at Wasatch Peaks.