How CDs Work: A Guide to Certificates of Deposit

Shawn Plummer

CEO, The Annuity Expert

Certificates of deposit, or CDs, are a type of savings account that offers a higher yield than a traditional savings account. A CD is a contract between you and the bank in which you agree to leave your money deposited for a certain period of time. In return, the bank agrees to pay you a fixed interest rate on your deposit. Let’s take a closer look at how CDs work!

What Are CDs?

A CD is a certificate of deposit, a type of savings account that offers a higher yield than a traditional savings account.

Long-Term Savings With No Liquidity

The first thing to know about CDs is that they are not like regular savings accounts. You can deposit and withdraw money without penalty with a regular savings account. With a CD, however, you agree to leave your money deposited for a set period of time, typically anywhere from six months to five years. If you withdraw your money before the end of the term, you will typically be charged a penalty.

A Higher Interest Rate Than A Savings Account

The second thing to know about CDs is that they offer a higher interest rate than a regular savings account. This is because the interest rate on a CD is fixed, which means it will not change for the term. This can be helpful if you are worried about the interest rate on your savings account going down.

Related Reading: The Best CD Rates From 423 Banks And Credit Unions

Compare CD Rates From 423 Banks And Credit Unions

Find the highest interest rates for your savings ranging from 3 months to 5 years.

CDs Are Safe Investments

The third thing to know about CDs is that they are a safe investment. Your money is FDIC-insured up to $250,000, which means that it is backed by the full faith and credit of the United States government. This makes CDs a low-risk investment option.

Conclusion

A CD may be right if you are looking for a safe investment with a higher interest rate than a regular savings account. Shop around and compare rates from different banks before deciding on a CD. And remember, if you withdraw your money early, you will likely pay the penalty. But if you are willing to leave your money deposited for a set period of time, a CD can be a great way to grow your savings. Thanks for reading, and happy saving!

Frequently Asked Questions

In which situation would a certificate of deposit (CD) be the best banking choice?

When someone wants a guaranteed return and won’t need the money for several years.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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