But how does a certificate of deposit work, anyway?
What Is a CD?
During that time, your deposit earns a fixed interest rate.
Once the CD term is up, you receive the money you originally deposited back plus the interest earned.
No Interest Til Almost 2027?
Bank with acredit union?
Ask your branch about share certificates, which are the credit union equivalent of CDs.
This makes CDs a low-risk investment option.
Did you know?
A CD lets you earn a fixed interest rate on deposited funds with a specified withdrawal date.
To get started, youll fund a CD account with a lump-sum deposit.
This money is called the principal.
Youll earn a fixed interest rate on your principal for the term of the CD.
Most CD terms last from six months to five years.
Some banks require a minimum deposit to open a CD.
These minimums can range from $500 to $10,000 or more, depending on the financial institution.
However, several banks offer CDs with no minimum deposit requirements.
Youre expected to leave the money untouched until the CD matures at the end of the term.
Withdrawing CD funds before the maturity date will cost you.
Specific early withdrawal penalties vary based on the term of your CD.
However, they typically range from 60 to 365 days of accrued interest earnings.
This can defeat the purpose of buying CD investments.
CD Basics
Here is some important terminology all CD investors should know.
CD Rates
A CDs rate is how much interest youll earn on your initial deposit.
A CD rate is expressed as anannual percentage yield(APY).
CDs earn higher rates than traditional savings accounts, and may earn more than ahigh-yield savings account.
CD rates are typically fixed: They wont go up or down after you open your account.
CD Maturity Date
A CDs maturity date is when its term ends.
This is when it’s possible for you to withdraw your funds and interest penalty-free.
You may also choose to renew a CD after it matures.
CD Penalties
Taking money out of your CD before the maturity date usually results in a penalty.
The federal government sets a minimum penalty on early withdrawals from CDs, but theres no maximum penalty.
Penalties are usually equal to a set periods interest earnings.
For example, you might lose 90 days or 12 months worth of interest if you withdraw funds early.
ensure to read your CD account agreement and understand your banks specific early withdrawal penalty policy.
When It Makes Sense to Open a CD
There are several pros to opening certificates of deposit.
Debt-free and ready for an emergency with a healthy savings account?
A CD might be right for you.
But remember: Diversifying your money tends to yield the best results.
Disadvantages of CDs
CDs have their downsides.
it’s possible for you to open a new CD at a brick-and-mortar bank or at an online bank.
Online banks can be a good option if youre looking to earn more money with the highest rate possible.
These digital institutions tend to offer more favorable APYs than traditional banks.
Not sure where to open your CD account?
Here are a few companies we like.
you might do the same when the two-year CD matures a year later.
Eventually, you will have five five-year CDs with one maturing each year.
Here are some special types of CDs with unique terms.
Jumbo CDs
Jumbo CDs carry a high minimum balance requirement (think $100,000 and up).
This flexibility often requires a higher deposit and a lower interest rate.
Most financial institutions with bump-up CDs limit you to one rate increase per term.
Step-Up CDs
These CDs include predictable rate increases at specified intervals throughout the term of the CD.
Liquid CDs
These CDs sometimes called no-penalty CDs give you access to your funds without penalty.
Terms may include a higher deposit and lower interest rate.
Most financial institutions still impose some withdrawal restrictions.
Alternatives to CDs
Looking for a safe investment for your cash?
CDs arent your only option.
Here are a few other ways to earn interest on your savings.
They earn an interest rate tied to the current inflation rate.
When inflation goes up, the interest rate on I bonds increases.
The rate is readjusted every six months.
you could only purchase I bonds directly from the U.S. Treasury.
In rare cases, they may earn as much as 1%.
High-yield savings accounts often require high initial opening deposits and high minimum balance requirements.
Like all savings accounts, youre limited to a certain number of withdrawals per month.
you might open a money market account at many FDIC-insured banks.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
