For many years, I didn’t know what CD’s at banks stood for or what they were used for.

Like many of you, the only types of “CD’s” that I knew of either contained my PC games or were used to blast music to drown out my teenage angst.

But as much as I’d like to reminisce over the early 2000’s, instead, the type of CD’s we’ll go over today can help you make more money off of the money that you already have and plan to have sitting at the bank.

WHAT IS A CERTIFICATE OF DEPOSIT (CD)?

A certificate of deposit (CD) is a special savings account that you can open at your bank.

What makes it different from a regular savings account? When you leave your money in a regular savings account, the bank will pay you interest on the money you have in it. You can deposit more money or withdraw money whenever you’d like.

However, with a CD account, you agree to leave a certain amount of money with the bank for a specific amount of time (i.e. 6 months, 1 year, 3 years, etc.). In return, the bank agrees to pay you a higher interest. The longer you commit to keeping your money with the bank, the higher the interest rate you’ll earn.

Typically it is a one-time deposit, so you won’t be able to keep adding additional money into it. Keep in mind, during the time period you have agreed to leave your money at the bank, you cannot withdraw the funds without paying a penalty.

Also, sorry to disappoint, but you won’t receive a physical certificate for your deposit.

ARE CD'S SAFE?

Yes. The interest rate the bank agrees to pay is fixed and guaranteed. There is no risk that this will change.

This means if you deposit $10,000 in a 12-month CD account that pays a 2% annual interest rate, at the end of 1 year, you walk away with your $10,000 plus $200 in interest. Note that typically the interest is applied to your CD account monthly or quarterly throughout the year but you will not be able to use it until the end of the CD term.

Additionally, most banks (i.e. Chase, Bank of America, etc.) are FDIC-insured up to $250,000. This means the U.S. government will protect up to $250,000 of your money in case the bank fails. This includes CD’s, just as with any deposit account (i.e. checking, regular savings). So the only risk with a CD account is the penalty you’d have to pay if you withdrew the money before your CD term was up.

SHOULD I OPEN A CD ACCOUNT?

A great time to open a CD account is if you have money that you’d like to store somewhere for a few months to a few years, and have no plans on touching it. You may be saving this money for a vacation, large purchase, or down payment for a home, where you’re planning to build a cash balance for a period of time and won’t need access to it.

Opening a CD account can also help discourage spending temptations during this time you’d like to save money, since withdrawing the money early will trigger a penalty fee.

WHAT I CONSIDER WHEN CHOOSING CD ACCOUNTS

These are just my own preferences, which consider my personal financial goals and priority for flexibility. You shouldn’t necessarily follow it, but they can hopefully help provide some factors for you to consider.

I prefer 6 month - 1 year term CD accounts. I don’t like to keep my money tied up for too long, especially when I may need the cash. I also haven’t found a CD with an interest rate worth locking my money up for so long over.
I compare the interest rates of CD accounts with high yield savings accounts. Always check interest rates of high yield savings accounts when looking at CD accounts. Sometimes they are very close (possibly even higher than CD’s sometimes). If you can earn the same interest without locking away your money, you may be better off opening a savings account. If I have a choice between a high yield savings account with a 1.7% interest rate vs a 1-year CD at 1.8%, I’ll go with the high yield savings account. The extra 0.1% is not worth it to me to lock my money up.
There are a variety of types of CD’s. My favorite is the “no-penalty” CD. Typical CD’s will charge a penalty fee if you withdraw your money before the term matures. A few banks offer “no-penalty” CD’s where you will not be penalized for withdrawing early. The catch is if you need to withdraw, you need to take out the entire amount - no partial withdrawals. For example, if you open a CD account with $10,000, and you only need $1,000, you will need to take out the entire $10,000 (and move it to a regular savings account). “No-penalty” CD’s generally provide a lower rate than regular CD’s.
I split up my money across multiple “no-penalty” CD accounts. You’ll probably notice a running theme of mine. I prefer flexibility in case I need to access my money. By splitting my money across multiple CD accounts, if I need to withdraw, I can close one at a time - leaving the other CD’s in tact.
I do not put all my cash savings into CD accounts. I like to keep a portion of my cash fully accessible in a high yield savings account. You do not want to lock away all your cash. Preferably, your emergency fund should be liquid to be ready for any unanticipated expenses.