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If you're considering what to do with your money and where to park it safely, you may want to look into getting a Certificate of Deposit Account, or CD.
what is a certificate of deposit or cd?
A CD is a type of savings account that offers a higher interest rate than regular savings accounts. They work by having you deposit a certain amount of money into the account for a set period of time; after which, you can either withdraw your money without penalty or renew your CD for another fixed duration.
Here are all the necessary details about CDs so that way you know all of your saving options and can make an informed decision about what works best for you.
here's a quick view of what we'll cover
how does a certificate of deposit account work?
As I mentioned earlier, a CD is a specific type of savings account that offers a higher interest rate. The way it works is that you agree to deposit a certain amount of money (typically $500 - $1,000) into the account for a set period of time, also known as the CD's "term." The term is based on your personal choice and typically ranges from 6 months, up to 60 months, which can vary depending on the credit union or bank. Once that term is up, you can either withdraw your money without any penalties or renew your CD for another fixed duration.
popular types of certificate of deposits
There are quite a few types of CDs that are offered. Here are the common types you are more that likely encounter.
A traditional CD is one of the most popular forms of saving and investment. Unlike other types of CDs, which offer more versatility in the way you can access your funds, a traditional CD locks your money away for a fixed period of time. This gives you an opportunity to earn interest on your investment without having to worry about withdrawing your funds early. Additionally, many traditional CDs come with guaranteed returns, making them an attractive choice for investors who are looking for a low-risk savings vehicle.
A high-yield CD, or certificate of deposit, is a type of investment that offers a higher rate of return than traditional CDs. This is achieved by tying up a larger amount of money for a longer period of time, typically 5-10 years. High-yield CDs often have minimum deposit requirements and can be subject to penalties for early withdrawal.
A jumbo CD, is a type of investment that offers higher interest rates than traditional CDs. While the structure and terms of jumbo CDs are similar to those of regular CDs, their larger size allows them to earn higher returns.
For example, while the typical minimum deposit for a regular certificate of deposit may be only $1,000, a jumbo certificate may require an initial investment of $100,000 or more. Additionally, the length and frequency of compounding interest may depend on the size and type of account.
Overall, jumbo CDs offer investors with larger sums of money an opportunity to grow their savings in a safe and low-risk way. Whether you want to invest for retirement or for another financial goal, choosing a jumbo certificate of deposit can help you reach your goals faster.
The name "no- penalty" should give it away. This certificate of deposit is designed to offer more flexibility than conventional CDs. Unlike a traditional CD, which penalizes you for early withdrawal, a no-penalty CD allows you to withdraw your funds at any time without being charged any fees or losing any interest. As a result, this type of CD can be ideal for anyone looking for short-term savings options or who may need access to their funds for unexpected expenses.
An IRA CD, or individual retirement account certificate of deposit, is a type of investment account held in a tax-advantaged individual retirement account. These accounts can be attractive to risk-averse investors who are looking for a safe and secure way to build their retirement savings. Unlike other types of investments that may offer higher returns but also involve some degree of risk, CDs offer a guaranteed return on your money with no chance of losing your principal investment. However, this protection does come at the cost of potentially lower returns than you might get with other types of investments.
A bump-up CD, also known as a rising rate CD, is a type of Certificate of Deposit that allows investors to take advantage of fluctuations in interest rates. Unlike traditional CDs, which typically have fixed interest rates that are set at the time of purchase, bump-up CDs allow savers to "bump up" their rates to a higher level if market rates go up.
This means that savers can benefit from increasing interest rates and earn more on their investment over time. Of course, there are some downsides to a bump-up CD as well; for example, these types of CDs often come with lower initial interest rates and may require a longer investment term than a standard CD.
This means that savers can benefit from increasing interest rates and earn more on their investments over time. Of course, there are some downsides to a bump-up CD as well; for example, these types of CDs often come with lower initial interest rates and may require a longer investment term than a standard CD.
A brokered CD is a special type of CD that you can only purchase through a brokerage firm instead of directly through a bank. Unlike regular CDs, which are almost always insured by FDIC or NCUA financial institutions, not all brokerages offer FDIC or NCUA-insured brokered CDs. So, before investing in a brokered CD, you must read the fine print and understand all the terms and conditions. Also, be on the lookout for any features like early withdrawal penalties or policies that make the CD callable.
benefits and risks of having a certificate of deposit account
- CDs are safe when purchased through a NCUA or FDIC insured credit union or bank.
- CDs offer a higher interest rate than regular savings accounts. This means that your money will grow faster in a CD than it would just sitting in a savings account. And since CDs typically have longer terms than savings accounts, you can end up earning a lot more money in interest over time.
- No monthly maintenance fees. Some financial institutions charge fees for having a savings or money market account. You wouldn't have to worry about that with a CD. Woo-hoo, you get tot keep to interest you earn (all of it). Just don't withdraw your funds before it matures.
- Guaranteed returns: When you invest your money for a predetermined period of time, you'll earn interest on the money that you have deposited, ensuring a predictable return on your initial investment.
For example, say you open a five-year (60-month) Regular CD with $6,000 and earn a 4.00% APY. At the end of your CD term, you’d have $7,300 and change. If you’re saving for a long-term goal that has a specific end date, you can tailor your choice of CD terms and interest rates to help you meet your goal.
Here's a CD calculator so you can see how much your CD could be worth.
- Higher rates than a savings account. This is because CDs are longer-term investment products, which means that the bank can offer higher rates in exchange for tying up your money for a certain period of time.
- Have to wait to use to access funds. With CDs the requirement for many institutions is that you have to wait until your funds mature before you can access it.
- Your money will be inaccessible for a certain period of time. Meaning that you won't be able to access it in the event of an emergency.
Also, many people find that having their savings held up over long periods of time can be limiting and make it more difficult to achieve their financial goals.
- Interest rate may not grow. There's always the risk that your rates are low and there won't be a great return of funds.
Despite these potential risks, many people still find certificates of deposit to be a relatively low-risk way to save and invest their money.
how do i open a certificate of deposit account?
You can open a CD at most banks and credit unions. To open an account, you'll need to meet the minimum deposit requirements, which can vary depending on the bank or credit union. Once you've met those requirements, you'll just need to fill out some paperwork and then your account will be open!
how do I choose a certificate of deposit account?
When it comes to choosing a certificate of deposit (CD) account, there are a few things to keep in mind. First, you need to think about when you need the money you intend to deposit and how long you are willing to keep it locked up. CDs often offer higher interest rates than other types of savings accounts, but they also come with terms that limit when you can access your funds.
So if you know that you will need the money in the near future, then a CD might not be the best choice for you.
Another thing to consider is projections for the dividends your CDs will earn over time. Always do your research and look at multiple options so that you can get a sense of what kind of returns to expect from different CDs. This will help you make an informed decision about which CDs are worth investing in and which ones may not provide enough reward given the amount of time the funds will be locked down during the duration of the CDs term. By taking these considerations into account, you should be able to find a CD account that works for you and helps meet your investment goals.
how much does a certificate of deposit account cost?
There is usually no fee to open a CD account and CDs do not incur any fees to maintain the account, making them a cost-effective investment option. However, some banks or credit unions may charge a small fee if you withdraw your money before the CD matures. This is typically called an "early withdrawal penalty." If you like, think of the penalty fee as something designed to discourage investors from withdrawing their money before the end of the term. That way your money can continue to grow undisturbed and reach its full potential.
can a certificate of deposit accounts generate income?
Yes, CD accounts can generate income in the form of interest. The interest rate on a CD is generally fixed, which means it will not change for the duration of the CD's term. This makes them different from other investments, like stocks or bonds, which can fluctuate in value over time. Because of this, CDs are often considered to be low-risk investments. The higher the interest rate, the more interest you will earn over time. Additionally, the longer the term of the CD, the more interest you will accrue since your money will have more time to grow. Sounds like a nice benefit to me? what do you think?
what happens when a certificate of deposit matures?
When a CD matures, it means that the term has come to an end and you can now either withdraw your money or renew your CD for another fixed duration. If you choose to withdraw your money, you will typically be able to do so without any penalties. However, if you decide to renew your CD, you may be able to do so at the same interest rate or a higher one depending on market conditions at that time.
are certificate of deposit accounts insured?
Yep! All deposits made at credit unions are insured by the National Credit Union Administration (NCUA) up to $250,000 per account. This includes both savings and checking accounts as well as certificates of deposit (CDs).
So if your credit union ever fails, your deposits will still be safe and accessible. The same goes for banks. Their CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. So regardless of which type of financial institution you choose, your deposits will always be protected.
how to avoid early withdrawal fees
Ok, I'm treading lightly with this one because the whole point of having a CD account is to save your money and let it grow so it ultimately benefits YOU! But if you think you'll need to do an early withdrawal, here's how to avoid a penalty. Simply find a no-penalty CD account! 😁 Yes there are financial institutions that offer no-penalty CD accounts. They may be rare but they exist. Otherwise, my tip to you is - don't touch your money.
If you're looking for extra funds and think you'll be tempted to touch your savings - here's some steps that will help.
ready to get your cd account?
The bottom line is that CDs can be a great way to grow your money while minimizing risk. They can also be a good option if you're looking for a fixed interest rate and predictable returns. But before you open a CD, make sure to do your research and compare rates from different financial institutions. That way you can find an account that meets your needs and helps you reach your financial goals.
If you'd like to start with ours, here a look at Skyla's CDs and interest rates. Psst… you can calculate how much interest you could earn there too!
Once you've decided how much money you want to deposit, the term you want and the interest rate that will effect how much interest your money will earn over the selected term - you'll start to see your money grow.
If you have any questions, any of the wonderful staff at your local Skyla branch will be more than happy to help! Not near a branch or short on time? Then simply send us an email or give us a call at 704.375.0183.
As the Content Specialist and author of the Learning & Guidance Center, Yanna enjoys motivating others by uncovering all that's possible in the world of finance. From financial tips and tricks to ultimate guides and comparison charts, she is obsessed with finding ways to help readers excel in their journey towards financial freedom.