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Certificate of deposits offer a safe haven investment, but they can also tie up your money. Are the best CD rates worth the investment?

The decision of whether or not to invest your money in certificate of deposits will depend on your unique situation. Typically speaking, it will make sense to invest at least some of your funds into this type of account as long as you have enough money to spare, but you may not want to invest all of your money into the best CD rates. It is not immediately obvious why, and it can seem counterintuitive, so here are some facts to consider.

The most important trade off of certificate of deposits is the fact that you lose access to your money until the maturity date. While it is true that you can withdraw the money early, you can not do so without losing some or all of the interest that you earned. If you have a solid financial plan for the future, this will not be an issue. As long as there is enough money in your savings account to deal with short term emergencies, and you are insured against larger scale problems, certificate of deposits are well worth investing in. If it is reasonable to expect that you might need the funds to deal with problems that could emerge before the maturity date, however, the best CD rates won't be worth the debt that you could fall into without access to your money.

Another consideration is the fact that the economy can change. Most CDs have a fixed interest rate. If the economy takes a turn for the worse, a fixed interest rate is good. Your funds continue to grow while everybody else is losing money on the stock market and other, more risky investments. On the other hand, if the economy swings upward, a fixed interest rate will start to look like it is limiting to you. The best CD rates are almost always offered by the longest term CDs, but if the interest rates change, what used to be a great return could start to look pitiful in comparison to newer CDs. If it seems likely that the economy could swing upward, it may be better to place the money in a short term CD, or to keep it liquid in a savings account until the future of the economy becomes more certain.

Generally speaking, if you have enough funds in your savings account to deal with emergencies, it is a worthwhile investment to start placing excess money into a CD in order to protect it from inflation. These funds can be used to save money for retirement. If you earn more money than you will need to support yourself in your retirement, you might consider investing the excess funds in higher yielding accounts. The decision will depend on the level of risk you are willing to take.