Understanding the Basics of a Certificate of Deposit (CD)
If you’re looking to earn more on your money than a typical savings account offers, certificates of deposit (CDs) might be a good option. However, they’re not suitable for everyone. Here’s what you need to know to decide if a CD is right for you.
### What Is a CD?
A certificate of deposit is a secure, income-generating investment that earns interest over a set period, known as a term. The term is the duration you agree to leave your money in the CD. If you don’t touch your money for the entire term, you avoid penalties. Terms can vary, so ensure you’re comfortable not accessing those funds for the full duration. When the term ends, the CD matures, and you can withdraw your money without penalties.
### Key Points About CDs:
– **Higher Interest Rates**: CDs usually offer higher interest rates than savings and money market accounts in exchange for leaving the funds untouched for the fixed term.
– **Ideal for Extra Cash**: CDs are great if you have extra cash that you won’t need for a while and want to earn more interest than a savings or money market account without risking your principal.
– **Variety of Options**: Almost every bank or credit union offers various CD options. Research to find the best rates, as some can be significantly higher than the national average.
– **Safety and Stability**: Compared to more volatile investments like stocks, CDs are safer and more conservative. They offer a guaranteed rate of return, though with potentially lower rewards.
### Choosing a CD Account
First, decide which bank to use for your CD account. Compare interest rates and maturity times to maximize your CD’s benefits. Most major financial institutions offer CDs, but terms can vary by location, and rates change, so check current rates before deciding.
Banks typically have a minimum amount required to open a CD, which can vary with the term and interest rate. For example:
– A 12-month CD at 5.30% APY; minimum: $500
– A 24-month CD at 4.50% APY; minimum: $500
– A 36-month CD at 4.00% APY; minimum: $500
Decide how much to deposit, open the CD account, and deposit the money. The funds will stay locked in for the entire term. Once the CD matures, you can withdraw your initial deposit along with the earned interest.
If you bank with a credit union, their CD products might be called share certificates. There are various types of CDs and strategies to maximize your earnings, so explore all options before committing your extra cash.
### How Is a CD Different From a Savings Account?
When deciding between a savings account and a CD, it’s important to understand the differences. Both are safe ways to save, but each has its nuances. A savings account allows you to withdraw funds anytime, while a CD requires you to leave the money untouched for the term to avoid penalties or loss of interest.
### Withdrawal Restrictions
CDs may impose significant penalties if you withdraw money before the maturity date, ranging from a few months’ interest to all the interest earned.