What Is a Certificate of Deposit?

When you’re looking for a safe and secure place to park your money, a certificate of deposit, or CD, is a great option. A CD is a type of savings account that offers a fixed interest rate and a predetermined date on which your money will be available again. A certificate of deposit offers a higher interest rate than a regular savings account and is a safer way to get a return on your money.

In order to open a CD, you’ll need to deposit a certain amount of money into the account. The money you deposit into a CD is then “locked-in” for a certain period of time. During this time, the money earns interest. However, you cannot withdraw the money from the CD early without paying a penalty. Many banks and credit unions offer the best CD rates with high annual percentage yields. There are a few things you should consider before investing in a CD, however. Keep reading to learn more about how CDs work and whether the investment is right for you.

 

What is a certificate of deposit?

When you deposit money in a certificate of deposit, you agree to let the bank keep your money for a specific period of time. In return, the bank agrees to pay you interest on your deposit. The longer you agree to leave your money with the bank, the higher your return rate will be.

Certificates of deposit come in many different lengths of time, called terms. You can choose a term that is as short as three months or as long as 10 years. The longer the term, the higher the interest rate you will earn. When your CD comes due or matures, you have a few options. You might choose to renew your CD for another term and continue earning interest at the current rate. You could also opt to withdraw the money and put it back into a checking or savings account. Additionally, you could use the money to purchase another certificate of deposit with a different term length and/or rate.

 

What are the risks of a certificate of deposit?

In general, CDs could be worthwhile for those who want low risk and guaranteed returns. Your money is relatively safe when you invest in a CD, but you won’t see huge returns. For example, in 2016, the average annual percentage yield on a one-year CD was just around 0.27 percent. While this is higher than a traditional savings account, it is not close to the return of other, riskier investments.

However, CDs are guaranteed returns. This means that you will get your original investment back, plus interest, regardless of what happens in the markets. This is in contrast to stock market investments, which can go up or down in value. This is why CDs may be a good option for those looking for low-risk, guaranteed returns. For example, if you’re retired and want to make sure your money is safe, a CD may be a good option. Or, if you’re looking to save for a rainy day fund, a CD can be a good way to do that.

Additionally, certificates of deposit are safe investments because they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per bank. This means that if your bank fails, you will not lose any money invested in CDs.

 

How do you select the right CD?

When you are looking for a certificate of deposit, there are a few things that you need to keep in mind. The first thing is to make sure that you are getting the best interest rate. It’s important to shop around when it comes to finding the best CD rates. Banks and credit unions offer different interest rates on their CDs, so it’s worth comparing rates before investing your money.

You also need to make sure that you are getting the right term for your needs. Keeping in mind that your investment is going to be tied up for a certain period of time, you’ll want to select a term that fits your situation. You should select a CD with a term that will allow you to access your money when you need it.

The next thing that you need to look at is the minimum deposit. You don’t want to have to put too much money down in order to get the certificate of deposit. Finally, you should consider the fees involved. There are some certificates of deposit that have no fees, and there are others that have varying associated costs. Make sure that you are also aware of the penalties that are involved with the certificate of deposit and the money that it will cost you to carry the CD.

A certificate of deposit is a savings account with a fixed interest rate and a fixed time period. CDs are a great way to save for short-term goals, like a down payment on a house or a car. They’re also a good way to earn a higher interest rate than you would get from a regular savings account. Keep in mind, though, that there are other options available that may offer better returns. For example, if you’re willing to take on a bit more risk, you may want to invest in stocks or mutual funds. However, if you’re looking for a safe, guaranteed investment, a CD may be a good option.