What are CDs and How Do They Work

A certificate of deposit (CD) is an account that holds a certain amount of money for a specific period of time. CD’s are made up of one initial deposit that you cannot touch until your time period is over. The time period could be for six months, one year, or five years. In exchange, your bank will pay an interest rate on your deposit. When it is time to redeem your CD, you’ll receive the money you originally invested, plus the interest it has gained.

CDs are considered to be one of the safest saving options. They are a safer investment than stocks and bonds because they are not as risky, although they have a lower opportunity for growth.

How do CD’s collect interest?

Your bank or credit union provides an interest rate on your CD in exchange for you agreeing to leave an untouched deposit for a certain period of time. Most CDs provide you with a locked interest rate, which is clear and predictable on what your interest return will be.

When is it a good time to open a CD?

There are many situations where a CD is a good investment option.

1. You have cash you don’t need now, but will want within the next few years. If you want to save up for a vacation, new home, or vehicle try investing your money in a CD.
2. You are scared to take risks. If you want to ensure you are growing and investing your money without taking a big risk, then a CD is a good idea for you.
3. If you have trouble with saving. If you currently have a savings account, but constantly find yourself tapping into it, getting a CD is a good option because you can’t withdraw funds for a certain period of time.
4. If you want to start an emergency fund. Putting your emergency fund into a CD allows you to have funds that will never decrease on hand in case of an emergency. If you encounter an emergency, there may be an early withdrawal penalty, but you will know you are only withdrawing during a true emergency.

Here are some things to think about when opening a CD:

1. How long should I invest in my CD? If you are saving up for a specific milestone in your life that involves a time limit, such as a wedding or a home, choose a shorter term. If you do not have a specific use in mind, choose a longer term.
2. When will your bank pay the interest? Your bank will either pay your interest to your CD monthly or quarterly.
3. What happens to CD maturity? Be thinking about what you want to do with your CD after it has reached its maturity rate. You can roll over the CD into a new CD, transfer the funds into another account, or withdraw the money.
4. Are there any penalties? If you encounter an emergency, you may need to withdraw money from your CD. Make sure you are aware of the penalties if you need to withdraw money.

In general, the more funds you deposit, the higher your return will be. Learn more about CD’s and check with your bank to find out the minimum deposit required to open a CD.