What Is A CD?

A Certificate of Deposit—otherwise known as a CD—is a savings account for money you’re prepared to lock up for a duration of time. This means you may not have access to the funds for a number of years, though the trade-off is, you earn a higher interest rate. When you invest in a CD account, you no longer have access to it until the term is complete. Removing funds early will often hit you with a fee that negates the benefits of having the account in the first place. If you’d prefer a normal savings account that’s less strict, see our savings accounts chart.

Different Types of CDs

There are a variety of different CD accounts available, depending on the amount of money you have to invest.  Most banks offer CDs from one month in length to 5 years in length.  The longer you can leave your money in the account, the higher interest your money will receive.

If you invest your money in a one year CD, each year your banking institution will send you a notice that your CD is up for renewal.  At this time, you will have a few weeks to withdraw the money without being penalized.  If you choose to leave the money in the account, it will stay in that account for another year.

What Are The Fees For Early Withdrawal?

Since a CD is set up for a specific amount of time, withdrawing the money before the allotted time is up will cost you a fee.  The fees for early withdrawal will vary depending on the bank, the CD length, and the interest rate you have been earning.  If you need to withdraw the money before the CD is up for renewal, talk to the bank and make sure you fully understand the amount of money you will be charged to withdraw the money.

Certificate of Deposit or Basic Savings Account?

Both CDs and savings accounts have two very different purposes, but both are necessary to have.  While both help you put money away for a future use, savings accounts are for the money you might need for an emergency.  The main benefit of having a savings account is easy access to the money whenever you need it.

A CD is for money you can afford to invest and essentially forget about for the length of the CD.  Once the CD has matured, or fulfilled the specific amount of time, you can withdraw the money without a fee.  Once the withdrawal window has closed, the money will stay in the CD earning interest for a renewed term.

Higher Interest Rates

Certificate of Deposit accounts offer higher interest rates than savings accounts.  To maximize the amount of interest you will be accruing, choose a longer term.

Online banks offer higher rates than local banks. It’s not unreasonable to earn 1-2% on a CD account, depending on duration of term and funds invested.

Choosing A CD

When choosing a CD, decide which length of time and account works best for you.  Just remember to choose an amount of money to invest and term you can see through to the end. Early withdrawal fees negate the benefits of opening the account in the first place. To earn the highest CD rates, use the chart above to find a 5 year account. Lower terms will earn you less, though also hold less of a risk of early termination fees.

Here’s a video from Zion’s that explain CDs well.