The ABCs of CDs
1. What is a CD
A CD, or certificate of deposit, is a type of investment that often offers a higher interest rate than traditional savings accounts. Unlike other investments, most CDs are insured up to $250,000 by the Federal Deposit Insurance Corporation, so they carry little risk and you can count on the promised interest rate.
Credit unions offer the same product, but they’re called share certificates. They are insured up to $250,000 by the National Credit Union Administration.
2. How do CDs work?
When you purchase a CD, you commit to invest a fixed amount of money for a fixed amount of time. These time periods are often five years or less. In return, the issuing bank or credit union pays you a set amount of interest, which you receive when you redeem your CD at the end of the term.
3. What kind of interest rate can I get with a CD?
The annual percentage yield (APY) you can expect from a one-year CD is currently 0.31%, according to Bankrate.com. See this week’s CD interest rates here. But there are credit unions and online-only banks that offer rates above 1% APY. The average bank savings account, for comparison, currently offers .06% APY, according to the FDIC. See this week’s bank savings account rates here.
4. What if I need my money early?
If you need your money before the fixed amount of time, or before the CD matures, you may have to pay a penalty, usually about three to six months’ of interest. The penalties can sometimes even mean that you may pay more than you have earned.
5. What’s a CD ladder?
You may have heard of a strategy called laddering. The idea here is that some money becomes available every few months or years if you need it. The way it works is you invest in multiple CDs with different terms, maybe one year, two years, and three years. Once the first CD matures, you put it in a new three-year CD. Repeat this process, and you’ll have a CD maturing every year if you need to access some of your savings.
6. What should I look for when selecting a CD?
Before you select a CD, be sure you know:
- When the CD matures
- What the CD’s interest rate will be, and if it could change, called a variable rate
- How you’ll be paid
- If the CD automatically renews after maturity, and if so, what your window of time is is for redeeming your CD
For more advice on selecting the right CD for you and what you should know before investing in a CD, check out this resource from the U.S. Securities and Exchange Commission.
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Take the America saves pledge
Make a pledge to yourself and create a simple savings plan that works. Complete the Pledge and America Saves will send you short email and text reminders, resources and tips to keep you on track towards your savings goal. Become part of an entire community of savers. Get started now!
creative ways to fund your savings
Those with a savings plan are twice as likely to save successfully. Taking the America Saves Pledge is a pledge to yourself to start a savings journey and America Saves is here to encourage you along the way. Take the first step toward creating a better financial future. Make a plan, set a goal, and pledge to yourself to start saving, today.
Congrats on completing the pledge!
Take the America Saves Pledge
Make a pledge to yourself and create a simple savings plan that works.