Any time you’re considering where to put your money, it’s crucial to first determine your financial objective and time horizon for those specific funds—essential requirements in formulating an appropriate strategy. With today’s persistently high interest rates, you may be wondering if owning a certificate of deposit—or “CD”—is right for you. It may be, but let’s first look at how CDs work and the purpose they serve in a portfolio.
What is a CD?
A CD is a short-term savings vehicle designed for short-term goals. When you buy a CD, it will pay a specified interest rate for a pre-determined timeframe—generally six months to two years. At the end of that timeframe, the CD “matures,” and you receive your original investment (also called the “principal”) plus the stated interest.
CD Risks and Drawbacks
Along with the benefit of offering slightly higher interest rates compared to a typical bank savings account, owning CDs also presents important risks and drawbacks you may want to consider:
Reinvestment Risk
Once a CD matures, you’ll need to decide what to do with the cash. You can purchase another CD, but if interest rates dropped over the course of your CD term, you may have to settle for a lower rate of return on your replacement CD.
Similarly, if you decide to use your CD proceeds to purchase a different asset, the price of that asset may have increased and you’ll have missed the opportunity to purchase it at the lower price, reducing your overall returns.
Liquidity Drawbacks
If you need access to some or all of your CD before it matures, you generally will incur early withdrawal penalties, potentially forfeiting a substantial portion of the interest you originally expected to earn.
Inflation Risk
The interest rate provided with a CD may not keep pace with rising inflation. At maturity, the cash you receive may not go as far—or buy as much—as the money you originally put in.
Shortfall Risk
The tradeoffs for short-term safety with a CD are lower returns over time and the possibility of falling short of your goals. For example, most people would never be able to retire solely off of money earned using CDs.
In summary, if you know you will need the money for a specific expenditure in one or two years and won’t need to access it earlier, a CD may be an appropriate option. However, if your time horizon for some or all the money is longer, or unknown, there may be more preferable options that can help you better realize your goals.
Physical gold, for example, is a strong portfolio diversifier, a widely recognized inflation hedge, and a liquid asset that is bought and sold around the world. It also provides excellent growth potential and never matures, so you can hold gold as long as you want or pass it along to your heirs as a form of generational wealth.
Today, more than ever, it can be critical to have an appropriate, carefully thought-out strategy in place for your money—one that includes the protection, preservation, and growth potential only offered by physical gold and other precious metals.
Call U.S. Money Reserve today to learn the best options for securing your financial future!
