Certificate of Deposit (CD)

Certificate of Deposit (CD)


It's nice to have money in the bank. It's even nicer to have that money earning money. A certificate of deposit (CD) offers a safe way to let your cash work more effectively for you than a savings account.

A CD pays a fixed interest rate over a specified length of time. That rate will be higher than you'll earn on a simple savings account. Your bank or credit union is willing to pay you more in interest because they're guaranteed the use of your money for an uninterrupted period of time. If you withdraw your cash before the term is up, however, you'll be hit with penalties.
CD Basics

The longer the term of a CD, and the larger the initial deposit, the higher the interest rate. Terms generally range from 6 months to 5 years. During that time, you won't have access to your money. You will, however, have the option of drawing out the interest as it's paid.

Let's say you put $1,000 in a CD for one year at an annual percentage yield, or APY, of 5 percent. At the end of the year, you'll have $1,050. Fifty dollars may not sound like a lot, but leaving it in a savings account with a 2 percent APY will earn only $20.

Another great asset of CDs: they're insured just like the money that you'd put into a savings account.
Know what you're getting

Certificate of deposits offer a variety of features. Some have "call" options that allow the bank to call it in if interest rates drop. Some CDs even have variable interest rates. Before you sign on the dotted line, ask questions, get answers and fully understand the CD that you're buying. You'll need to know:

1. When the CD matures
2. The interest rate and whether it changes
3. Whether the CD can be called, or terminated early
4. Penalties for early withdrawal
5. How and when you'll be paid

A certficate of deposit is one of the safest investments you can make. Don't let your cash grow moldy in a savings account; make better use of it with a CD.