When you are looking for a place to put your money, you may come across the term “certificate of deposit.” What is a certificate of deposit? How is it different from a savings account? And why would you open one?
In this article, we will answer all of those questions and more. We will discuss what CDs are, the different types available, how to choose the right one for you, and why they might be a good choice for your money. So, if you want to know what a CD can offer you, read on.
What is a Certificate of Deposit?
Let’s start with the basics: What is a certificate of deposit? A certificate of deposit is a savings account with a bank or credit union that has a set interest rate and term length. You agree to leave your money in the account for the specified amount of time, usually anywhere from six months to five years, in exchange for earning interest at the agreed-upon rate.
When it comes to current CD rates, you can generally expect to earn more interest than you would in a standard savings account. In addition, it is important to mention that CDs are FDIC insured, just like savings accounts, so your money is safe in the event of a bank failure.
Now that we know what a CD is, let’s take a look at the different types available.
What Are the Types of CDs?
There are several different types of CDs, each with its own set of benefits and drawbacks. The most common types are:
- No-penalty CD: This type of CD allows you to withdraw your money before the end of the term without paying a penalty. However, you will likely earn less interest than you would have if you left your money in for the full term.
- Jumbo CD: A jumbo CD is a high-balance account that usually requires a minimum deposit of $100,000. In exchange for this higher balance, you will likely earn a higher interest rate than you would on a standard CD.
- High-yield CD: A high-yield CD is an account that offers a higher interest rate than a standard CD. These rates are usually reserved for longer terms, such as five years.
- Bump-up CD: A bump-up CD allows you to increase your interest rate once during the term of the CD if rates go up. This can be a good choice if you think rates might arise during the life of your CD.
- Brokered CD: A brokered CD is a type of account that is sold through a broker. These CDs often have higher interest rates than those offered by banks and credit unions.
- Step-up CD: A step-up CD offers increasing interest rates over time, which can be a good choice if you plan to keep your money in the account for a long time.
Now that we know the different types of CDs, let’s look at how to choose the right one for you.
Choosing a CD Account
When choosing a CD account, there are several factors you will want to consider, such as:
- The interest rate: Obviously, you will want to choose an account with the highest interest rate you can find. However, it is important to remember that higher rates often come with longer terms.
- The term length: As we mentioned, CD terms can range from six months to five years. You will want to choose a term that fits your needs. For example, if you need to access your money soon, you will want to choose a shorter term. If you are looking for long-term growth, a longer term may be a better choice.
- The minimum deposit: Some CDs have minimum deposit requirements, while others do not. You will want to choose an account that fits your budget.
- The fees: Some CDs have fees, such as early withdrawal fees. You will want to choose an account that has the lowest fees possible.
Once you have considered all of these factors, you should be able to choose the right CD account for you.
Why Would I Open a CD?
CDs, unlike most other investments, provide fixed, safe, and often federally insured interest rates that are frequently higher than those offered by many bank accounts. And if you’re willing to put your money down for a longer length of time, CD rates are usually greater.
CDs have become a more appealing option for savers who wish to earn more than most savings, checking, or money market accounts pay while avoiding the market’s risk and volatility. In addition, CDs can serve as an excellent way to diversify your investment portfolio.
How Is a CD Different From a Savings Account?
While both CDs and savings accounts are FDIC insured, there are some key differences between the two. For one, savings account rates tend to be lower than CD rates. In addition, savings accounts offer more flexibility, as you can withdraw your money at any time without penalty. CDs, on the other hand, typically have early withdrawal penalties. Finally, savings accounts are not subject to income tax, while CDs are.
Why Would You Open a Certificate of Deposit?
CDs offer several benefits that make them an attractive option for savers. First, they provide fixed, safe, and often federally insured interest rates that are frequently higher than those offered by many bank accounts. Second, CDs can serve as an excellent way to diversify your investment portfolio.
For example, if you have a portfolio that is heavily invested in stocks, investing in a CD can help to balance it out. Finally, CDs are not subject to income tax, which can save you money in the long run. In addition, if you are looking for a long-term investment, CDs can be a good choice.
Certificates of Deposit offer a variety of benefits, including higher interest rates than many bank accounts, the ability to diversify your investment portfolio, and no income tax. When choosing a CD account, there are several factors you will want to consider, such as the term length and minimum deposit. CDs can be a good choice for savers looking for a long-term investment. Hopefully, this article has helped you to better understand how CDs work and why you might want to consider investing in one.