Rising interest rates over the past couple of years may have caused headaches for borrowers, especially those in the housing market, as the cost for loans increased steeply throughout 2022 and into this year.
Savers, on the other hand, are enjoying competitive yields on certificates of deposits (CDs) for the first time since the onset of the Great Recession in 2007.
“As the stock market continues to cause concern, certificates of deposit, or CDs, may be more attractive to people who want to earn a little money on their hard-earned cash without taking the full plunge of entering into a volatile or underperforming market,” says Kala Kuhlthau, Senior Vice President and Sulphur Branch Manager with Lakeside Bank. “CDs are attractive because they are low-risk and carry a guaranteed principle.”
Kuhlthau explains how CDs work: You invest a fixed sum of money for a fixed period of time, and the bank pays you interest that is higher than a traditional savings account. When you cash in your CD, you get your money back, plus the accrued interest given by the bank. You can choose to invest your money for six months, five years, or more, depending on what the financial institution is offering in terms and what you choose. There is a penalty for early redemption, if you withdraw earlier than the term you agreed upon.
“In general, CDs are fairly straightforward and easy to understand. It’s important to make sure you understand all of the details,” says Kuhlthau. “CDs are a great way for consumers to get into the habit of saving because they require a committed investment period. CDs typically offer higher interest rates than savings accounts, so that’s another added benefit.”
Most financial professionals recommend that CDs work as a supplement to a diversified investment portfolio. “To develop any savings and investment strategies, including one with CDs, you should speak to a financial professional. Everyone has different financial goals – some long-term, some short-term. Those things make a difference in how you invest in your CDs,” says Kuhlthau.
She offers these tips for anyone considering a CD investment:
- Make sure you understand the terms and have everything in writing. Be sure you take note of when your CD matures – you don’t want to revisit your investment in six months, only to discover that it’s been committed for six years.
- Confirm the interest rate on your CD. You need to know if it’s fixed or variable and how it will be paid. Monthly? Semi-annually?
- If you invest in a variable rate, you need to understand how the interest rate will work. When will it change? How? There are structures in the variable-rate CDs that explain these things. Make sure you understand them.
- Understand the penalties for early withdrawal.
Visit www.mylksb.bank or the Lakeside nearest you in Lake Charles, Sulphur of Moss Bluff, to learn more about CDs.