What Is a Bank CD? How a Certificate of Deposit Works
A CD, also known as a certificate of deposit, is one of many great ways you can invest for your future. They are useful for saving for just about anything, whether it's for your retirement, college, a house, or just a rainy day. With minimum requirements, getting started can be as easy as logging on to your computer.
Obtaining and maintaining a certificate of deposit is extremely simple and straightforward. Not only that, but CDs are one of the safest forms of investment.
Typically, CDs pay off a higher interest rate than a savings account, which is the main reason they are so popular. If you've never worked with bank CDs, you'll want to know the details, so read on to get the full scoop!
What Is a CD?
In a nutshell, a CD is a long term savings account. It is essentially a promise you make to your bank that they can hold onto your money for a specific length of time. This allows the bank a set amount of time to use your money for lending or investing. Because the bank trusts that you will not suddenly withdraw the money, it's a safe chunk of dough for them to use.
Banks give out a higher APY (annual percentage yield) on CDs than savings accounts. The higher the APY, the more money you'll earn with your deposit. Each CD you create will last for a length of time. This is also known as the "term." Before getting a CD, it's important to shop around for a rate (APY) and term that will work best for you.
They are safe. If you choose a bank that is member FDIC, your CD is insured by the FDIC, just like a savings account. It doesn't get any safer than that!
It's important to remember that generally speaking, the longer CD term you select, the higher the APY you can earn.
Is a CD Right for You?
A CD is the perfect financial product for just about everyone. There are some things you will have to consider before getting a CD. Since a CD is essentially a promise to your bank that you won't touch the money for X amount of time, you'll have to make sure you have enough money set aside for an emergency. You won't want to withdraw your CD early, so make sure you have a bit of money socked into a savings account for unexpected expenses.
CDs are a great choice if you have extra money that you won't be needing for a while. If you know you won't touch the money for a long time, a CD is a fantastic option.
You'll also want to make sure you have enough money for a CD. Each bank has different minimum requirements. Some are as high as $2500 for a CD, but I have personally seen minimum requirements as low as $50.
If you can meet the minimum requirement condition and also won't be needing the money any time soon, a CD is something you should definitely consider.
Maturity and Penalties
When your bank CD matures (reaches its term), you have a couple of options on what to do with your cash. Generally you have one to two weeks to decide whether you want your money or you can reinvest your CD (and even the interest you've earned on it, if you want.) Usually, if you don't pull your money out of the CD, your bank will automatically renew the contract and reinvest it, so it's important to get your money if you're going to need it soon.
Since interest rates on CD change rapidly, check with your bank to see the current interest rate upon reinvesting. It's a good idea to shop around for a great rate. Don't feel guilty about moving your money from bank to bank depending who is offering the best rate, it's YOUR money.
Need to cash our your CD early? You can do this, but it's important to know there is almost always a penalty for doing so. The penalty varies from bank to bank. If you think there is a possibility of cashing in your CD early, make sure you check the penalties when shopping around.
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Shopping Around: Tips for Choosing a Bank
Almost every financial institution offers CDs, so finding a bank is easy. You'll want to do some comparison shopping so that you can get a CD at a great rate for a term that works for you. Do your research and go from bank to bank, don't just get a CD where you have a checking account, you'll want to shop around so you can raise your earning potential.
When you're shopping around, it's a good idea to use a calculator tool to quickly find out how much interest you can earn. You will need to know the amount you plan on depositing, the term length you're interested in, and the interest rates from various banks. Finding out how often the interest on your CD will compound is also a great idea.
You can comparison shop right at home using your computer. Most banks have their own website, so you'll want to check with banks you know and trust.
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