Understanding certificates of deposit: a simple guide to CDs

When it comes to saving money, most people know about checking and savings accounts – but there’s another option that can help your money grow with a little extra stability: Certificates of Deposit, commonly known as CDs.

A CD is one of the simplest, most secure ways to earn more on your savings. Whether you’re building an emergency fund, planning for a large purchase, or simply looking for a higher return than through a standard savings account, CD’s can play an important role in your financial plan.

What is a CD?

A certificate of deposit is a type of savings account that holds your money for a fixed period of time, called a term, in exchange for a guaranteed interest rate.

When you open a CD, you agree to deposit a certain amount of money for a set term, which could range anywhere from a few months to several years. In exchange, the bank pays you a higher interest rate than you’d typically earn with a regular savings account.

When the term ends (known as the maturity date) you get your original deposit back, plus the interest that it earned.

Why choose a CD?

CDs are popular because they offer a combination of security and predictability, compared to other saving and investment avenues. Here are some of the key benefits:

• Guaranteed returns: your interest rate is locked in for the full term, protecting you from market fluctuations.
• Low risk: CDs are insured (up to applicable limits) by the FDIC, meaning your money is safe.
• Simple and straightforward: no market timing or complex investment decisions are needed – you receive a fixed rate and can pick the term that fits your goals.
• Good for short- or medium-term goals: CDs can be a great fit if you know you won’t need the money for a specific period, such as saving for a down payment, a vacation, or college expenses.

How CDs work

When you open a CD, you’ll decide on three key factors

• Deposit amount: how much you want to invest up front.
• Term length: how long you want to keep the money in the CD (common terms range from 6 months to 5 years, but shorter and longer options are available).
• Interest rate: the rate your money will earn for the duration of the term.

Once your CD reaches maturity, you’ll have a few options for what you can do next. You can opt to withdraw your funds, which includes your initial principal and the interest earned, renew or “roll over” your funds into a new CD, or move the money into another account.

What to watch for: early withdrawal penalties

CDs reward patience – so they work best when you can leave your money untouched for the entire term. If you need to withdraw funds before maturity, you’ll usually pay an early withdrawal penalty, which will reduce your interest earned.

That is why it’s a good idea to keep some funds in an accessible checking or savings account for true emergencies, while letting your CD earn interest in the background without needing to rely on it.

Types of CDs

While traditional CDs (with terms from 6 months to 5 years) are the most common, many banks offer a few variations to best meet savers’ goals:

• Bump-up CDs: allow you to raise your rate once if market rates go up during your term.
• Add-on CDs: let you make additional deposits after opening.
• Jumbo CD: offer higher rates for larger deposits (typically in excess of $100,000).

Is a CD right for you?

A CD can be a great fit if you have extra savings that you’re confident you won’t need to access right away, and want a predictable, low-risk return. They’re great for savers with a specific short- or medium-term goal, who prefer a simple investment option without worrying about market volatility.

Final thoughts

CDs are a tried-and-true way to help your money grow safely. With guaranteed returns, flexible term lengths, and a variety of options to fit your specific goals, CDs can play a valuable role in your overall savings plan.

Whether you’re new to saving or looking to diversify or manage your cash, talk with your banker about current CD rates and which terms align best with your goals. Some quick planning today can help your savings work harder for tomorrow.