1 Year CDs–Should you invest in a certificate of deposit for 12 months?
One year CDs can be a great investment opportunity for those wanting a safe and almost guaranteed return on money. CDs are fully insured by the FDIC so long as the financial institution you use is covered, and you invest within FDIC account limits. And as long as you don’t withdraw the funds before the 1 year maturity date, then you can basically earn a guaranteed amount of interest within that time.
How Do 1 Year CDs (12 Month) Work?
One year CDs work like this: You first must select a bank or financial institution offering a CD in the 1 year length. This is a common length offered by most banks, so it shouldn’t be too difficult to locate them. You will definitely want to compare cd rates for this CD length, and also view each of the CD terms imposed by the bank. For example, some banks may offer a bump-up rate, while others do not. Some may impose a stiff penalty for early withdraw, others may not.
When you choose the bank you will use to invest, then you can open the CD account. At this time you will fill out paper work (either electronically or in person), and invest teh funds (usually via check or wire). You will then have the CD account active and compounding interest until the maturity date (which would be the full year). The CD will have the maturity date listed on the account documents.
There are important considerations, however, if you do plan on investing in a 1 year CD. There are both advantages and disadvantages to this type of investment.
1 Month CD- Advantages and Benefits of This Investment Type
Some of the benefits or advantages of investing in a 1 year CD include:
- Higher Interest Rates that shorter length CDs– 1 year CDs typically offer slightly higher interest rates that CDs for shorter lengths (ie, 1, 3, or 6 month CDs). Therefore, you can earn higher interest rates and earnings.
- Guaranteed Interest Earnings–While nothing in life is guaranteed (except death and taxes), CDs are a very reliable and safe form of investment. The funds will be insured by the FDIC as long as you meet the requirements. So you will basically get a guaranteed and safe return that you can count on.
- 1 Year CDs May Have Perks–Since most financial institutions want to encourage a longer investment, 1 year CDs may include more beneficial terms. For example, a 1 year CD may have more frequent compounding of interest than a shorter length (giving a higher yield). Some may have reduced penalties on early withdrawal. Some may include features such as a “bump-up” clause that allows for a one-time increase in the rate.
My very first CD investment was a 1 year CD. My wife and I knew we wouldn’t be able to buy a house at the time (as she was still in nursing school, and I only had self employement income. So we decided it would be best if we waited to buy a house when she graduated. So we decided to invest in a 1 year CD so we could earn interest and still know that our funds would be secured. CDs are great for sitations like that, and a 1 year CD would be appropriate for those wanting a safe, low-risk investment, for that length of time.
1 Year CD: Disadvantages of Investing in a One Year CD
- Return May Be Lower Than Other Investments–While stocks, bonds, and mutual funds may carry more risk and no guarantees, they also may offer a higher reward. Thus, the income generated from a 1 year CD may or may not be less than what you could have earned in a strategic investment portfolio of higher-risk investments.
- 1 Year Lengths May Not Be Appropriate for All–1 year can be a really short, or a really long time depending on how you look at it. If you don’t want to tie up your funds for a whole year, then a 1 year CD may not be best for you. Especially if you suspect you may need the funds earlier, in which case you may face a penalty for early withdrawal.
- 12 Month CDs May Require Minimum Investments: Banks may require a minimum investment amount to $500, $2,500, or even $10,000 or more. This will vary be each bank, but some CD accounts require a minimum investment that may deter some investors.
Conclusion 1 Year CDs Can Be a Great Investment for the Right Person
1 year CDs make a great investment for those:
- Wanting an almost guaranteed income of interest
- Those who want to reduce risk in their overall investment strategy
- Those who can invest for 1 year without needing to withdraw the funds early
There are some disadvantages, as with all investments, but CDs are great investments, and a 1 year CD is a common length. Make sure to read about other CD Lengths.