When Are CDs the Best Place for Your Cash?

There are many different places to invest your money. Certificates of deposit are one of them. 

CDs allow you to invest a set amount of money for a fixed period of time, which usually ranges from a few months to a few years. You promise to keep your money invested for that time period and, at the end of it, you get back your funds along with interest. 

The interest rate you're paid is determined upfront when you buy the CD and is typically quite a bit higher than the rate you'd get with a standard savings account. However, it's likely lower than what you could earn if you opened a brokerage account and began buying stocks. 

The big question is, when should you invest in a CD versus other investment options? Here's what you need to know.

CDs are good when you need short-term, low risk investment options 

A CD is a great option if you want to make a short-term investment and can't afford to take on risk because you will need the money relatively soon. 

Although CD rates can vary depending on many factors including the length of the time you're tying up your money, as mentioned above, the APY is typically higher than what you'd earn in regular savings accounts. And, the APY is guaranteed for the entire time you have the CD. While your rate could drop with a high-yield savings account as rates fluctuate, you'll know exactly what you're going to earn when you invest in a CD. 

You'll not only be getting a higher rate with a CD, you'll be doing it without any risk since CDs are FDIC-insured up to $250,000 per person, per account. So, you can maximize the amount of money your money makes for you without taking a chance of losing it in the stock market. 

Typically, with a CD, you will have to agree to tie up your money for a minimum of three months or six months, depending on the bank -- although you can also choose a CD of a longer duration. If you are setting aside money for a big purchase and your deadline for buying is more than three or six months out, a CD may be the best place for those funds as long as you're confident you won't decide to act early. 

There are many big purchases you may be saving up for over a period of months, or even years, such as a home down payment or to buy a car. If you know you won't be purchasing your home before the CD maturity period, investing the down payment funds in a CD to get the best risk-free returns could make sense. 

Don't use CDs as a long-term investment vehicle or when you need to be able to access your money anytime

While CDs are a great option to invest for the short-term, they aren't the right choice for funds you might need right away, such as an emergency fund. That's because the money can't be accessed early if you need it unless you pay a penalty. And CDs aren't a good option for long-term investments, since the rate they typically pay is generally well below what you could earn by investing in the stock market. 

By understanding what role CDs should play in your financial life, you can make sure you're putting your cash into them only when it makes sense. So, if you know you're OK with tying up your money for a little while but your investing timeline is around three years or less so you can't afford to risk buying stocks, a CD may be your smartest bet.