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What is a CD?

A certificate of deposit (CD) is a savings vehicle used to grow your money over a predetermined amount of time. It’s also referred to as a “timed deposit,” which means that once you select the length of your term, you’re required to keep your money there until the scheduled period is over.

Insured by the FDIC

Most CDs are insured by the Federal Deposit Insurance Corporation (FDIC), which means that your money is backed by the FDIC and will be returned to you even if the bank fails. The money is backed dollar-for-dollar including accrued interest, and is typically insured for up to $250,000. Make sure your CD is FDIC insured before investing in it to make sure your money is safe.

Term lengths

The length of time you choose to invest your CD is known as the "term length". Typically term lengths range between a few months to ten years, and banks usually offer higher interest rates for longer term lengths.

Penalties

Removing the money earlier than the specified time you originally committed to can result in penalties. Penalties can vary based on the length of the term.

Savings account vs CD

As with savings accounts, the intent of a CD is to set aside money that you won’t need in the near future so it has time to accumulate interest over time. CDs usually offer fixed interest rates, which makes them a more worthwhile investment if your goals are long-term. Because you’ll be penalized for withdrawing money from a CD before the term length is up (aka, before the CD matures), savings accounts are typically best for those who wish to have access to their money while they save, and CDs are a great option for those who don’t need access for a while.

Types of CDs

  • Short term CDs are CDs for less than 18 months.
  • Long term CDs are for 48+ months.
  • Liquid or breakable CDs offer low to no penalties for early withdrawal before the CD maturity date. However they typically offer lower return rates and require you to maintain a minimum balance. Breakable CDs adhere to the fluctuation in interest rates. So if the interest rates for CDs go up during the term length of your CD, your interest rates will too. If the interest rates go down, so will yours.
  • Callable CDs typically provide high fixed interest rates because they allow the bank an opportunity to call off your term length early and return your investment with any interest they may owe you. The bank may do this if interest rates drop below the fixed interest rate on your CD because they can borrow money more cheaply than they can pay you interest for borrowing yours.
  • Jumbo CDs provide high interest rates because they require enormous minimum investments (upwards of $100,000).
    • Both jumbo and callable CDs are mostly uncommon and not typically offered to average consumers.
  • IRA CDs are tax-deferred investments that grow at a fixed rate over the course of the term period.

CD Laddering

Laddering is a savings strategy many use to enhance returns on CD investments without tying up money in one or two long term CDs. The idea is to invest some money in both short term and long term CDs to allow you periodic access to funds as the CDs mature while also maintaining a long term savings strategy.

If you’re interested in investing your money in a CD or have any questions about CDs or savings accounts, don’t hesitate to give us a call or stop by your local branch to speak with a dedicated member of our team today.