What IS a Certificate of Deposit?

 

If you’re looking for a way to save money and earn interest, consider opening a certificate of deposit (CD). These accounts offer guaranteed returns without the risk associated with stocks or bonds. Read on to learn more about certificates of deposit to determine whether they are right for you.

A CD Is A Type Of Savings Account

A certificate of deposit (CD) is a type of savings account that is sold by banks, thrift institutions and credit unions. CDs differ from savings accounts in that they have a fixed term and usually a fixed interest rate. They are often used by people who want to save money and have a specific goal in mind for it. For example, people who are saving for a house may want to set aside money in a CD account. CDs are also popular for people who don’t like risk and who want to avoid the volatility of the stock and bond markets. CDs are FDIC- insured up to $250,000 per depositor, per account, per ownership category, so you know your money is safe.

Higher Interest Rates

CDs generally offer a higher interest rate than a traditional savings account. The difference is that you put your money into a CD and agree to leave it in the bank for a fixed term. The interest you earn on your CD will be locked in for that term, so if rates fall during your term, your interest rate stays the same. Savings accounts have variable interest rates that fluctuate depending on market conditions. That’s why it’s important to compare the annual percentage yield (APY) of your savings account with a CD. Both CDs and savings accounts are FDIC- or NCUA-insured, so your funds are protected up to $250,000 per depositor, per institution in the unlikely event of a bank failure. The best type of savings account for you will depend on your personal finances, needs and preferences. Be sure to shop around and consider any minimum deposit requirements, as well as fees.

A Guaranteed Return

Because of this, it is often a good idea to purchase several CDs with varying terms, a practice known as CD laddering. This can be a good strategy if you want to ensure you take advantage of high interest rates throughout your entire investment term. If you need access to your funds during the term of your CD, you should be aware of the penalties that can come with a withdrawal. It is also important to remember that the interest on your CD may be subject to tax. It is a good idea to contact your financial institution before making any investments to determine which documents are necessary to open your certificate of deposit.