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When the stock market gets shaky, lots of folks start wondering about the safest place to keep their money. One question that pops up a lot is, “What happens to CDs if the market crashes?” CDs, or certificates of deposit, are similar to savings accounts, however, you will not be able to access the funds for a specified amount of time. In return, you get a guaranteed amount of money back. They’re a good option for people who don’t want to risk losing their savings in the stock market. But how do they stack up when things get rough economically?
Key Takeaways
- CDs are safe because they are typically FDIC-insured, as most banks are.
- They offer a fixed interest rate, so you know what your return will be.
- FDIC insurances covers up to $250,000 per depositor, per bank.
- Think about when you might need access to your money before choosing a CD.
- CDs are a solid choice for many, but it’s important to decide based on your needs.
Why CDs Are Considered Safe
CDs are considered a safe investment because they come with a fixed interest rate. This means, unlike stocks, you know from the start how much money you’ll make. Plus, they’re insured by the government (specifically, the FDIC) up to $250,000. So, even if the bank goes belly up, your money is protected.
Federal Insurance Limits on CDs
The government promises to protect your money in a CD up to $250,000. This is a big deal because it means your money is safe no matter what happens to the bank. But, if you have more than $250,000, you might want to spread your money across different banks to keep it all insured.
When considering opening a CD, make sure to plan ahead. Here are some key factors to think about:
Term Length
CDs come with fixed terms, ranging from a few months to several years. The term you choose should align with when you anticipate needing access to your funds. Longer terms typically offer higher interest rates but require a longer commitment.
Early Withdrawal Penalties
Withdrawing money from a CD before its maturity date can result in penalties. These penalties can eat into your principal amount or significantly reduce your earned interest Make sure you’re aware of the specific penalties your bank imposes on early withdrawals.
Interest Rates
A CD’s interest rate is fixed upon opening the account, making it immune to market fluctuations. While this can be an advantage if interest rates fall, it also means you won’t benefit from rising rates. Compare current CD rates to ensure you’re getting a competitive return on your investment.
Financial Goals
Consider your short-term and long-term financial goals. If you’re saving for a specific purpose that’s a few years away, a CD can be a good way to ensure your money grows at a steady rate. However, if you might need quick access to your funds for unexpected expenses, a more liquid savings option could be better.
Insurance Limits
Remember that the FDIC insures CDs up to $250,000 per depositor, per bank. If your total balance exceeds this limit, consider spreading your funds across different banks to maximize your coverage.
Renewal Policies
Understand your bank’s policy on CD renewal. Some CDs automatically renew at the end of their term for another period at the current market rate. If you don’t want to renew, you typically have a short window to withdraw your funds without penalty after your CD matures.
Laddering Strategy
To balance the desire for higher interest rates with the need for access to your money, consider a CD laddering strategy. This involves opening several CDs with different terms so that a portion of your investment matures at regular intervals, providing periodic access to some of your funds without penalty.
By keeping these considerations in mind, you can better decide whether a CD aligns with your financial situation and goals. CDs can be a valuable tool for saving, but they’re not one-size-fits-all, so it’s important to choose the option that best fits your needs.
Potential Drawbacks to CDs
While CDs are safe, they’re not perfect. Since the interest rate is fixed, you might miss out on higher returns if interest rates go up. Plus, compared to high yield savings accounts or checking accounts, your money is less accessible in a CD. High yield savings accounts might offer slightly lower interest rates, but you can get to your money whenever you need it without penalties.
Market Crashes and CDs
Even if the market crashes, your CD is still safe. Your interest rate won’t change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.
Final Take
CDs can be a smart choice if you’re looking for a safe place to keep your savings, especially when the market looks uncertain. They offer safety through FDIC insurance and a guaranteed return on your investment. Just remember to consider how soon you’ll need your money and to keep an eye on how CDs compare to other savings options. If you think a CD is right for you, it might be a good time to open an account. Remember, the best choice is the one that matches your financial needs and goals.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
