Everything You Need to Know About Certificates of Deposit (CDs) and Their Benefits

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions that holds a fixed amount of money for a specified term, such as six months, one year, or even five years. In return, the financial institution pays interest at a rate typically higher than that of a regular savings account. Once the CD reaches its maturity date, the account holder can withdraw the initial deposit along with the accrued interest.

How Do CDs Work?

When you open a CD, you agree to keep your money in the account for a set period. The bank or credit union guarantees a fixed interest rate during this term. Unlike a regular savings account, early withdrawals from a CD before maturity often result in penalties, which can reduce or even negate the earned interest. Traditional CDs offer a fixed interest rate for a set term while high-yield CDs provide a higher interest rate, but often require a larger deposit.

Benefits of Saving Money Through a CD

1. Higher Interest Rates: CDs generally offer higher interest rates than traditional savings or checking accounts, helping you grow your savings more efficiently.
2. Guaranteed Returns: Unlike stocks or other investments, CDs provide a predictable return.
3. FDIC or NCUA Insurance: Most CDs are insured up to $250,000 per depositor, ensuring the safety of your funds.
4. Encourages Long-Term Saving: Since withdrawing funds early results in penalties, CDs help discourage impulsive spending and promote disciplined saving.
5. Flexible Terms: CDs come with varying terms, allowing savers to choose the duration that best fits their financial goals.

Considerations Before Opening a CD

• Liquidity Needs: Ensure you won’t need immediate access to the funds before the CD matures.
• Interest Rate Trends: If interest rates are expected to rise, consider a shorter-term CD.
• Penalties for Early Withdrawal: Understand the fees associated with accessing funds before maturity.

Is a CD Right for You?

CDs are ideal for individuals looking for a low-risk savings option with guaranteed returns. They are particularly useful for short-to medium-term financial goals, such as saving for a home, a major purchase, or retirement. However, if you need more liquidity or higher potential returns, alternative investments like money market accounts or stocks* may be better suited to your needs.

How do I get started?

To open a High Yield CD, apply online here.   *Money Market funds and stocks are not FDIC/NCUSIF insured, not a deposit and may lose value.