All about Certificates of Deposit (CDs)

How Does a Certificate of Deposit Work?

According to Investor.gov a certificate of deposit or CD is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.

Savings accounts and CDs both pay you interest on your money, the main difference is a CD is timed. This means you commit to leaving your full balance in the account for an agreed upon amount of time, often in exchange for a higher interest rate than you get in a savings account. There are often fees, penalties and even possible lost interest you have earned if you need to cash in the CD early.

CD vs. a Savings Account

Both CDs and savings accounts are low-risk, low-yield investments. But there are a few key differences. CDs usually have a higher interest rate because you are committing to keep your money in savings for a set amount of time. The interest rate is normally locked in and won’t be lowered if the market fluctuates. These two factors make it less tempting to take out the money before the time limit is up! Plus, you can possibly add more money to the CD, if you want. CDs are a better choice if you know you won’t need access to your money immediately. Keep in mind, there are often minimum deposit requirements for starting a CD. Outside of the minimum deposit requirement, setting up a CD doesn’t require anything different than setting up a savings account.