CD Overview

CD Overview

No doubt, when some of us hear the term "CD," we find ourselves thinking of our favorite music and artists (for me, it's Morrissey's "Vauxhall & I" which I just got from eBay for 99 cents).  But we're focusing on another kind of CD -- the kind that can make you money instead of take it from you: the certificate of deposit. 

What's a CD?

So just what is a certificate of deposit? It works a little like a savings account.  You designate a certain amount of money to go into a CD, where it will draw a specific rate of interest over time.  Unlike a savings account, though, a CD is meant to hold your money for a fixed amount of time -- usually six months or a year.  If you decide to withdraw money from the CD before the time is finished (say, seven months into a CD that's set for a year), you could find yourself paying a pretty substantial penalty.  However, keeping your money in the CD until it completes its term -- or comes to maturity, in bank-speak - can give you more dough than you originally put into the CD in the form of accrued interest. 

CD or Savings Account?

So how do you know when a CD is a better deal than a savings account? Interest rates are an important factor when it comes to CDs.  They can vary from bank to bank, month to month, and CD to CD.  A CD of shorter length might yield a smaller interest percentage than one that is of a longer length.  Amounts of money put into the CD can affect interest rates, too.  A larger sum of money in a CD might get you a higher and better interest rate than a smaller lump of change.  Another thing to keep in mind is that interest rates are typically fixed when it comes to CDs, but some banks and institutions will offer a CD with an interest rate that fluctuates. 

Particularly in today's economy, savings accounts pay barely more than 0% interest, so shop around to see if you can find CDs with higher interest rates than a savings account, then make sure you have the financial bandwidth to keep your money in the CD without dipping in for the full length of the certificate.

Of course the obvious downside to a CD is that you don't have immediate access to your money. CDs are for when you don't think you'll need the money in the near future. If you can afford to keep your hands of your funds for a little while, a CD can be the perfect low-risk option when you'd like to make a little bit of a return on your cash.

Find a Balance

Take a look at your savings strategy to determine how much you'd like to keep in cash and how much you can put away to see grow at a faster rate in a CD. Then, simply do your homework to find the CDs with the best rates available.

Happy saving!

Photo Source

MoneyCone's picture

MoneyCone wrote:

Tue, 12/07/2010 - 19:07 Comment #: 1

And by staggering CDs using a technique called laddering you can get even better rates without tying up your money.

Nice post Melinda!

Melinda Gregory's picture

Melinda Gregory wrote:

Tue, 12/07/2010 - 23:06 Comment #: 2

Thanks for the sharing the laddering tip, MoneyCone!

Carnival of Wealth #16 – Dec 12 2010 Edition — Per's picture

Carnival of Wealth #16 – Dec 12 2010 Edition — Per wrote:

Mon, 12/13/2010 - 12:02 Comment #: 3

[...] it establishes a list that people can follow to achieve their success!”Jessica presents CD Overview | MomVesting posted at MomVesting, saying, “What is a CD, and how do you know when it’s a better [...]

Financial Definitions - Glossary for Understanding Finances 's picture

Financial Definitions - Glossary for Understanding Finances wrote:

Thu, 01/19/2012 - 21:46 Comment #: 4

[...] Bonds C Capital Gains Carrying Costs CDs – Overview CD Ladders Compound Interest Credit vs Debit Credit Scores Current [...]