Invest In Bonds Or Open A CD? Keep An Open Mind.
If you’re looking for generally safe ways to earn returns on your savings, bonds and certificates of deposit (CDs) are two good options. Knowing the differences between the two and how each can play a different role in your financial life could impact which one you choose. Read on to learn the ABCs of CDs and bonds.
A CD is a type of savings account: You agree to lock up an amount of money at a credit union or a bank for a period of time, usually anywhere from three months to five years. When the time period ends, the CD matures and you receive your money back plus any interest that has accrued.
Typically, a CD earns more money than a standard savings account and there’s usually a minimum amount of money you need to deposit depending on the terms you select.
Open A CD When…
…you’re looking to lock up savings for short-term goals (think buying a car or a house within a few years). CDs can act as a guard against tapping into that money and they’re also low risk: CDs have federal insurance for up to $250,000 per account, which means that if the bank or credit union goes bankrupt you would still get your cash back.
Additionally, the fixed rate of CDs guards against fluctuations in the stock or bond market. Be aware, however, that CDs have early withdrawal penalties that could cost you three to six months’ worth of interest.
Think of a bond as a loan to a company or the government. Similar to a CD, you lock up your money for a fixed term in exchange for interest offered at a fixed rate. Like a CD, bonds usually require a minimum investment, which can range from $100 to $5,000 or more depending on the bond type.
You can purchase bonds individually but you can also choose to buy them through bond mutual funds that offer lower-cost access to a diversified group of bonds. Unlike a CD, a bond can be sold before it reaches full maturity.
Consider Bonds When…
…you want a cushion against stock market volatility. If you’re edging closer to retirement, you might choose to invest less in stocks and more in bonds as they won’t be impacted by market fluctuations.
Bonds also generate steady income over time as they’re considered a fixed income investment, meaning that the bondholder (you) receives interest payments in regular installments. Hold the bonds to maturity and you’ll get back the full amount you put in plus interest. Note that rates of return vary by the term and type of bond.