2 Year CDs are a common term length offered by most financial institutions. 2 year CDs can be a great investment for those wanting to put their money in an account that will slowly accrue a safe and almost guaranteed rate of return. Two year (24 month) CDs also tend to offer competitive rates as compared to CDs of shorter lengths.
How Does a 2 Year CD Work?
A 2-year certificate of deposit account works much like any other CD account. An investor should always do the market research to make sure that the current interest rates are competitive. Once a bank or other financial institution has been located, you can then review the terms and conditions of the CD offer. Pay close attention to details such as whether or not the CD has a bump-up rate, any early withdrawal fees or penalties you may incur, and other important factors.
Once the 2 year CD account has been opened, the investor just sits back and waits for the interest income to compound. At the end of the 24 month (two year) period, the CD will “mature,” and the investor can withdraw the funds or renew the CD for another 2 year term.
While these cd lengths can be a great option for many investors, they may not work for everyone.
2 Year CDs: Advantages of Investing in a 24 Month Certificate of Deposit
- 2 Year CDs offer higher interest rates. By investing in a 2 year CD, you could earn a higher rate of interest as compared to shorter CD lengths. In fact, sometimes the difference between a 1 year CD and 2 year CD can be as much as 1 percentage point or more. This could result in considerably more money depending on the invested amount.
- 2 Year CDs may offer bump up rates and other perks. Banks and financial institutions generally want to encourage longer investment durations. Therefore, they will likely offer more beneficial terms for longer length CDs. The CD may include a bump up rate (meaning you can increase the interest rate to the most current rate should the market strengthen). They may also offer more frequent compounding of interest, pay “dividends” of the interest earnings, or other perks to entice the longer invesments.
- The Investment is FDIC Insured. As long as the bank you use offers FDIC insured CDs (and you meet the requirements), then you can have peace of mind about your invesment.
- You Can Calculate Your Return–Other investments such as stocks or mutual funds are uncertain. You could gain money, lose money, or break even. But either way, you often have no way of knowing what your exact return on investment will be. With 2 year CDs, you can calculate the exact amount you can expect to earn. This can help with overall financial planning.
2 Year CDs: Disadvantages of Investing in a 24 Month Certificate of Deposit
- Reduced Rate Compared to Other CDs. While this length may demand more interest than other shorter CDs, it will also earn less than longer-term cds. So a 2 year CD will typically offer a much lower rate than a 5 or even 10-year cd. This difference could equate to thousands of dollars in high “jumbo” amounts.
- Penalties for Early Withdraw. Two years can be a short time or a long time, depending on how you look at it. But let’s face it–a lot can happen in 2 years. A person may become unemployed, they could suffer a financial loss, or more. Also, perhaps a much more lucrative investment could come along, or perhaps you may get a brilliant idea for a business. Either way, there are many possibilities that could happen within 2 years that would require you to withdraw the money and possibly face a penalty.
- Other Investments Could Be More Lucrative. By investing in CDs, you reduce your risk while also reducing your earnings. With more volital investments (such as stocks), you could earn more money–but with great risk of loss. So there is always a trade-off when investing in CDs.
24 Month CDs are a Great Investment Tool
If you are looking for a safe and insured investment, that can make you an almost guaranteed return–and you plan on investing for at least 2 years, but perhaps not much more—then a 24 month (2 year) CD may be right for you. There are situations where other CD lengths may be more beneficial, but this is a common length of time which will offer higher interest rates compared to shorter deposit accounts.
Keep reading to learn more about CD lengths.