When you think about certificate of deposits, do you consider it an investment or a savings account? There are differences between what can be considered an investment vehicle and what would be considered a savings option. Investments offer higher-return capital appreciation with some level of risk while savings are lower-returns with more stability. Fixed rate CDs would fall into the category of savings as you know exactly how much interest your contributions will earn over the period of time you select, and the money is held in FDIC insured institutions which means you are not at risk to lose your contribution.
Fixed rate certificate of deposits offer security and stability for your money. The ultimate goal for savings accounts is to keep money available for emergencies, necessities or to pay for something you'll purchase in the future, while the goal of investment vehicles is to accumulate wealth.
While you are not at risk of losing money saved in a fixed rate certificate of deposit, it's not without all financial risks. For example, liquidity risk is always a concern when saving money with fixed rate deposits. You can't get access to your money until the certificate of deposit matures without paying penalties and/or surrender charges to get the money back out. You are committed to leaving the money into the CD until maturity. Some fixed rate deposits will also impose penalties on capital, and you should avoid them unless they are going to provide significantly higher interest than your other savings options. You can reduce the liquidity risk by having cash that is liquid, like an emergency fund, so you won't have to pull the money from your certificate of deposit in the event of an emergency.
Fixed rate investments also face “purchasing power risk”, which pertains to the actual value of money over time. As inflation fluctuates, if it is higher than the interest rate on your fixed rate CD, the savings will actually have a “negative real rate of return”. The money in the account has a lower purchasing power than it did when you first deposited the money into the certificate of deposit. To avoid purchasing power risk, you'll want to select a fixed deposit certificate of deposit only after determining if the fixed interest rate will match or surpass headline inflation.
For individuals with a low risk-tolerance, a fixed rate certificate of deposit (or any fixed rate, FDIC insured savings option for that matter) may be a good option for you. In addition to providing security against loss of money, the ideal fixed rate savings plan will preserve the real value of your funds and have minimal or no surrender charges.
When selecting a fixed rate certificate of deposit, you'll want to watch that the interest rates match or exceed headline inflation, that there is no risk of losing your money, and that you either will not need to pull the money from the CD early or that they will not charge you excessive fees if you do withdraw the money. If the certificate of deposit meets this criteria, they are useful tools for investing for your retirement and when used alongside other capital appreciation investments, a certificate of deposit demonstrates good financial judgment and is a valuable addition to your portfolio.