Certificate of Deposit Pros and Cons List
If you have some money available and you don’t want to have it just sitting in the bank waiting for you to spend it, then you can invest it in a variety of ways. Some investments are safer than others but generally, you can get a little bit more money by making smart investments with it. Most of the investment types available obey a very simple premise: the bigger the risk, the bigger the profit – provided you don’t lose everything.
A certificate of deposit limits the risk but still allows the money to grow. Usually, a certificate of deposit is offered by either a credit union or a bank and it works pretty much like a savings account. These allow higher interest but they deny access to the money for pre-determined amount of time. Let’s look at the pros and cons to further understand the issue.
List of Pros of a Certificate of Deposit
1. Barely Any Risk
A certificate of deposit is almost risk free since it is backed by government institutions and other systems that support your investment. It is very unlikely that you lose your money and it guarantees a predictable outcome that you can rely on.
Other types of investments, such as the stock market, can make you lose everything you have and have absolutely no guarantee of you making some more money. On top of that, the stock market might crash and then a lot of people are going to lose their money
2. High Interest Rates
A normal savings account has a very low return on investment because of the low interest rate associated with it. However, with a certificate of deposit the interest rates are higher and this also means that the return on investment is a little higher. Additionally, the longer the amount of time yyou have the money on that entity, the greater the amount you earn.
List of Cons of a Certificate of Deposit
1. No Access To The Money
While you can be making a very smart investment with a certificate of deposit, economic situations can change drastically nowadays and there might come a time where you need the money before the pre-determined amount of time expires. The only way that you will be able to touch the money in this situation is if you pay a fee that is going to be considerable.
2. Inflation Risk
If inflation grows in the middle of your certificate of deposit, this means that you can end up making no additional money at all and, if the situation is bad enough, you can even lose some money on your investment. Even though it is unlikely that inflation grows exponentially during a small amount of time, it is still a risk that you take.