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For most investors, the ultimate goal is building wealth over time. There are many different ways to invest money, and they all have varying amounts of risk and return. Not everyone is interested in playing the stock market, however.
For conservative investors with $100,000 or more who are risk-averse, or who are willing to let their money mature over time, a jumbo certificate of deposit might be an ideal investment.
On this page:
- What is a Jumbo CD?
- What is the Difference Between a CD and a Jumbo CD?
- Pros of Investing in a Jumbo CD
- Cons of Investing in a Jumbo CD
What is a Jumbo CD?
If you have a checking or savings account, or even if you’ve looked into various savings products, you’ve probably heard of a certificate of deposit, or CD. It’s a means of saving money that allows you to deposit for a specific length of time.
In return for letting the bank use your money during that time, you get a higher interest rate than you would with a regular savings or checking account that you can withdraw money from at any time. If you withdraw the money early on a jumbo CD, you pay fees and penalties that can wipe out any interest you may have accrued up to that point.
Once the CD matures, you can access not only the funds that you put in, but any accrued interest as well. CDs can be cashed out at maturity or rolled over into a new CD so that the interest accrued on the original product can start earning interest as well. That results in exponential growth as the interest compounds and is capitalized onto the balance.
What is the Difference Between a CD and a Jumbo CD?
Where a certificate of deposit is normally offered in amounts like $1,000, $5,000, or even $10,000, a jumbo CD starts at $100,000. While local banks don’t normally offer them, investment firms, brokerage houses, and other organizations deal in CDs frequently.
What Are the Pros of Investing in a Jumbo CD?
Some of the benefits are fairly obvious. Jumbo CDs are comparatively low-risk as opposed to mutual funds or stocks, and there is less danger of losing your initial investment during market fluctuations or recessions. The interest rate is locked in as well, so even if rates go down, you’ll still be earning the rate agreed upon at the time of deposit.
Jumbo CDs also earn more interest than a regular CD. At most, you will likely earn a percentage point or less on a jumbo CD versus a regular CD, but this difference can be thousands of dollars over time. You’ll make more over time with one jumbo CD than you would if you broke the initial investment up into smaller denomination CDs. If you have a large investment portfolio, they’re a good way to balance out more risky investments elsewhere.
What Are the Cons of Investing in a Jumbo CD?
Not everything about CDs is great, however, even when it comes to jumbo ones. Even the higher interest rate on a jumbo CD is much lower than other types of investments, including IRAs, mutual funds, or even money market accounts. As a result, your returns will be less than they would if you used a different investment vehicle.
In some cases, their rate of return is even lower than the annual inflation rate. That means that, while you won’t lose money, your return may be worth less in terms of spending power at maturity than it would have been at the beginning of the CD’s term.
In addition, FDIC insurance, which protects your money in case of an economic meltdown or banking institution failure, only protects $250,000. That means if you get a jumbo CD for that amount, you could lose your interest.
While jumbo CDs are a stable investment, if you’re looking to invest $100,000, other investment options can provide a higher rate of return, perhaps with the same low risk.
Jumbo CDs are reliable investment options, but there are assets that provide higher returns. If you’re more concerned with safety and maintaining value over time, but not as worried about high rates of return, a jumbo CD might be a good option for you. If, however, you’d like to see some significant returns while maintaining that initial value, you may want to talk to your investment professional or do your own research to find a product that will best meet your needs.
Author: Jeff Gitlen