3-year cds can be a great way to earn a stable interest income while enjoying the security that cds offer. Selecting a CD length of 3 years will ensure that you get a competitive interest rate as compared to shorter length cds. These CD lengths may not be right for everyone, but a 3 year CD is definitely an investment tool that everyone should consider adding to their portfolio. This is especially true if you want to add an investment that will give an almost guaranteed return without risking loss.
How Do 3 Year Cds Work?
Three year CDs work just like other time deposits. It is best to first compare market interest rates, various banks, and also the terms each bank will require when investing. Once a bank or financial institution has been selected, you must fill out the necessary forms either online or in person. You must then add money to the account, which is usually achieved by writing a check or via wire transfer.
Once the funds have been invested, it will begin to accrue and compound the interest throughout the life of the CD. When the cd has matured (3 years in this case), you can then withdraw the funds, or renew the CD if there is an aut0-renew option.
3 Year CDs: Advantages of Choosing a 3 Year CD
There are definitely many advantages to selecting and opening a 3 year deposit account. Some of these include:
- High CD Rates–3 year deposit accounts typically command some of the highest rate among the CD lengths. It will offer much higher rates when compared to monthly or 1-2 year CDs. This difference can be as much as 1-2 percentage points (which could mean the difference of thousands of dollars). So by stretching out your investment for a longer term length, you could earn more money.
- 3 Year CDs May Offer Dividend Payments–When you invest in longer length CDs, some banks may offer the ability to withdraw the interest earnings at regular intervals (for example, quarterly). This is common in 3, 5, and 10 year lengths. If the financial institution offers this, then it can be a great way to earn money from large “jumbo” investments. You get the funds as they compound, while the principal remains intact.
- Funds Are Secured–When investing in an FDIC insured bank, you can rest assured that as long as you meet the requirements of FDIC coverage, your funds will be insured. This can give you peace of mind.
- Interest Income is Guaranteed–Since a CD will always pay the rate agreed in the terms, you can know exactly how much income you will earn before you even invest. This is great for those who want a guaranteed return on investment, while minimizing risks.
3 Year CDs: Disadvantages of Investing in 3 Year CDs
As with all investments, there are also a few disadvantages to consider:
- Funds Cannot Be Withdrawn for 3 Years–You usually won’t be able to withdraw the principal funds from this type of CD without incurring a penalty. A lot of changes can happen in 3 years. You may lose a job, develop a health problem, get married, have a child, etc. So if you suspect a major life change could happen within 3 years, you may want to invest in a shorter length CD (unless the penalty is very small and insignficant for early withdrawal).
- Interest Rates are Higher for Other CDs–While 3 year CDs often attract competitive interest rates, investing in an even longer term (5 year or even 10 years) may yield even more interest income.
- Other Investments May Offer Higher Returns–While CDs offer respectable returns and low risk–other “high risk” investments could offer a higher return. This is always a gamble, however, and there is no guarantee that other investments will outperform a CD within a given time.
- Dividends May Reduce Earnings–If you select a CD that offers dividend payments, your earnings could be reduced. Traditional Cds compound the earnings regularly, which may lead to higher realized yield. Dividend CDs, however, will often remove interest earnings and deliver them to the investor. Thus, only the principal is compounded, which may reduce total earnings as compared to a non-dividend CD.
3 Year CDs: Conclusion
3 Year CDs are a common length of time in which these deposit accounts are offered. The benefits include a safe, insured, and known investment. The downside is that the funds must mature before they can be accessed (or otherwise a penalty may be imposed).
If you are looking for a safe deposit account that offers more than a traditional savings account, then you may be interested in opening a 3 year CD.
Keep reading to learn more about CD lengths.