Bonds and certificates of deposit (CDs) are generally safe ways to earn returns on your savings, but they play different roles in your financial life. Here’s what to know
A CD (certificate of deposit) is an interest-bearing certificate commonly offered by banks, savings and loans, and credit unions to raise money for their business activities. You deposit money with the issuer for a set time, and the issuer promises to repay you at a specified interest rate.
Are CDs right for you?
You may want to consider investing in CDs if:
- You’re saving for a short-term goal, such as buying a house, in the next 2 to 5 years.
- You want a low-risk place to park cash you don’t plan to use right away.
- You think that interest rates will soon go up
- You’re looking for higher yields than you’d get with bank accounts and money market funds.
- You don’t want to risk losing any principal
Bonds are simply loans you make to a government, government agency, or corporation to finance projects and other needs. The bond issuer agrees to repay you at a fixed interest rate by a specified date, or maturity.
Are bonds right for you?
You may want to consider investing in bonds if:
- You think that think interest rates will soon go down
- You want to minimize the taxes you pay on your investment income
- You have a long-term investment horizon
Whether you’re looking to increase your savings yield or hedge against stock market volatility, both bonds and CDs can be valuable additions to a diversified portfolio. But each has its own advantages and disadvantages. To decide which is right for you, you’ll need to consider your income needs, investment time horizon, and your opinion about the future direction of interest rates.
If you decide that bonds are a better fit for your situation, investing in a diversified bond mutual fund or ETF could be an easy way to start. And if you decide to go with a CD, make sure to shop around for the best rates available, as they can and do vary among banks.