Certificates of deposit, or CDs, are one type of savings product to consider as you work toward your savings goals. To find out which CDs are right for you, learn the basics.
Although a CD is a deposit account, in some ways a CD can be compared to a promissory note issued to you by a bank. You give the bank a set amount of money for a specified period of time. In return, you get your principal back with interest when the CD “matures.” Typically, the longer the CD term, the higher the interest rate you will receive—for example, a five-year CD will typically offer a higher interest rate than a 6-month CD. One important note: you may have to pay a penalty for withdrawing the principal from your CD before the term ends, which may reduce your principal amount.
Pick your term. Figure out how long you want to invest your cash, then, proceed accordingly. Some online banks offer APY calculators so you can estimate how much you’ll earn over time. (APY means “annual percentage yield” and is the percentage earned on a deposit, taking into account compounding interest, assuming the funds remain untouched for the year.)
Pick your type. Some banks offer different types of CDs and CD interest rates to choose from. What might be right for your rainy-day fund might not be appropriate for some other savings goal. If you’re not sure, you could speak to a financial professional and the bank’s customer service agent to understand your options, and then select the CD term that best suits your personal needs.
Pick your rate. Shop around for CD interest rates, and keep in mind that online banks may offer higher interest rates than you'll find at brick-and-mortar institutions in your neighborhood.
Be smart. Make sure you conduct your CD business with an institution insured by the Federal Deposit Insurance Corporation (FDIC). For more information on FDIC insurance visit the FDIC website at www.fdic.gov/deposit. If you’re not sure whether a bank is FDIC-insured, call and ask.