Certificate of Deposits (CDs)

A Certificate of Deposit (CD) is a financial product that allows you to deposit a specific sum of money for a set length of time, which can range from a few months to several years. In exchange for your commitment, you receive a guaranteed interest rate typically higher than a standard savings account. CDs are an excellent choice for individuals seeking a low-risk investment with predictable returns. By locking in your funds for a set term, you benefit from the stability and security that CDs offer, making them an ideal option for both short-term savings goals and long-term financial planning.

There are several reasons why you may consider using a CD for managing your savings goals. Here are some of the main benefits or advantages of saving money with certificate of deposit accounts:

1. Safety: Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That’s because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you’re covered in case the bank shuts down or goes out of business. The current coverage limit is $250,000 per depositor, for each account ownership category, per financial institution. At federal credit unions and the majority of state-chartered credit unions, the NCUA insures your money up to the same limits.

2. Guaranteed Returns: CD accounts offer predictability in that it’s relatively easy to determine how much interest you’ll earn over time, since rates are typically fixed for the entire term. Certificate of deposit calculators allow you to plug in the amount you’re saving and your APY to gauge how much your money will grow. For example, say you open a five-year CD with $5,000 and earn a 1.00% APY. At the end of your CD term, you’d have $5,255 and change. If you’re saving for a long-term goal that has a specific end date, you can tailor your choice of CD terms and interest rates to help you meet your goal.

3. Higher Rates: Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That’s because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment. When comparing high-yield savings accounts and CDs side-by-side, it’s helpful to see how interest rates compare. And if you’re opening a CD when rates are relatively low overall, you may lean toward a bump-up or step-up CD that allows you to capitalize when rates begin to rise.

4. CD Laddering: CD laddering is a savvy savings technique that allows you to keep your money liquid and accessible while taking interest rate changes into account. When you build a CD ladder, you’re essentially opening multiple CDs at different interest rates and with varying dates of maturity. This approach to using certificates of deposit for savings means you continuously have CDs that are maturing. You can then decide whether to take your money out or roll it into a new CD to take advantage of higher rates.

5. No Monthly Maintenance Fees: With savings accounts or money market accounts, you may get charged a monthly maintenance fee to use the account, which can quickly eat into your interest earnings. Certificate of deposit accounts, on the other hand, typically don’t charge a monthly maintenance fee.
This means you get to keep all the interest you earn. Assuming you don’t need to withdraw money from a CD before it matures, CDs can be a fee-friendly way to grow savings.