When saving money for your financial projects, you must consider where to keep them. A good example is when high-yield savings and money market accounts offer above-average interest rates while keeping funds liquid. These options are appropriate when saving for a short-term need, such as an emergency fund.
On the other hand, certificates of deposit or CDs can help save and earn interest on the money you won’t need in the near term. CDs offer advantages and disadvantages for savers, like any other deposit accounts. Knowing how they measure up is always helpful, especially when deciding where to keep your savings.
A Certificate of Deposit, also known as a CD, is a savings account with a fixed interest rate higher than a regular one. It also has a fixed term length and a selected withdrawal date known as the maturity date. You lock funds in a CD for a term ranging from 3 to 5 years.
CDs are time deposit accounts. It allows you to hold money for a specific amount while earning interest on your savings.
A CD can be used as a vehicle for your savings, but it differs from a savings or money market account. While you can make up to six monthly withdrawals if needed with savings or money market accounts, CD accounts assume that you won’t withdraw any money until it matures.
Opening a CD account may require you to make a minimum initial deposit. You’ll have to choose a term when you use a Certificate of Deposit.
The terms of the CD may range from 28 or 30 days to 10 years or more. But it depends on the bank or credit union. As a general rule, the longer the term, the higher the interest rate you can earn on a CD.
However, some banks may offer promotional CDs with higher rates in shorter terms or periods.
The Annual Percentage Yield or APY for CDs is fixed. That means you can earn the same rate for your entire Certificate of Deposit term. There may be exceptions, as well.
Once your CD matures, you can withdraw the money you saved and the interest your earned. However, you must specify that you want to withdraw your money, or it may automatically roll your savings at the end of the term into a new CD. Some banks automatically do that.
The bottom line is, Certificate of Deposits are one of the safest spots to keep your money. This feature is because the cash held in a CD is insured. It can also offer a higher interest rate on your deposits if you agree to keep your money in the CD for a period or term. The interest rate and APY you earn depend on the bank, the CD term, and the current interest rate environment.
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