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
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.
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.