Certificates of deposit or CDs are a type of savings account. However, unlike a basic savings or money market account, most CDs have a fixed interest rate. This means the rate doesn’t rise and fall with the economy. It’s set at the time of purchase.
Also you will purchase them for a fixed term ranging from three months to five years. This means your money will be unavailable for you to withdraw during the term without being penalized. The early withdrawal fees should be explained to you before you open the account.
The good news is that Certificates of Deposit pay much higher interest rates than most savings and money market accounts. Usually higher principal deposit amounts and longer terms offer the highest interest rates.
In addition, most banks require a minimum amount to open the account. These vary from bank to bank so check around for the best deals. It’s important to note that smaller institutions usually offer higher interest rates than larger ones.
You can usually have the interest payments sent to you in a check or you may choose to have them deposited in your checking or savings account. You can also elect to leave the interest in the CD and allow it to compound over the term. Compound interest can add up quickly.
When you open a certificate of deposit you may receive a paper certificate but it’s more likely that the CD will simply consist of a book entry and be included in your bank statement.
At the end of the term, the certificate of deposit matures. At that time, you can withdraw the principal and interest earned without any penalties. You can also choose to roll some or all of the money over into another CD for the same term as before or a different term.
You will be notified by your bank before the maturity date but you will only have a certain amount of time to withdraw your money. If you do nothing, the bank will usually roll-over your money into a new CD with the same terms as the old one.
There are so many variations and choices when you open a certificate of deposit that it's virtually impossible to list them all. Only the basics have been covered here.
It’s best to talk with your banker and let them know what you’d like from your CD. Let them know how much you can deposit and how long you feel comfortable going on the term. That way they can work with you to customize the options to fit your plan.
It’s important to remember that Certificates of Deposit are more long term than savings accounts and usually pay more interest. They are insured like other bank accounts, which make them a very safe investment option. They are an ideal addition to your wealth building or retirement portfolio. For more information about this, check out the section on financial planning.From Certificates of Deposit to Banking Information