A Certificate of Deposit (CD) is a type of financial tool typically available through banks, credit unions, and other financial institutions. It is like a savings account in that you put money into the CD; if left there, it continues to grow over time. Yet, it is significantly different because these accounts typically limit access to funds for a specific period.

If you are considering ways to save money, this can be a valuable tool and resource to take into consideration. Here’s what you need to know about them and how they work.

What Is a Certificate of Deposit Account?

A CD is a type of financial product you buy from a financial institution. It would pay interest at a specified rate at the end of a specific period if you left the funds in the account. For example, you may open a CD for $500 with a six-month term. That means that, for six months, those funds are primarily out of reach.

One of the core benefits of CDs compared to other savings accounts is that they tend to pay at a higher interest rate, including higher than most high-yield savings and money market accounts.

Most of the time, CDs provide guaranteed returns. That is, as long as the funds remain in the account for the given time, they earn the specific interest agreed upon at the end of the term. When choosing them, your money is protected from loss if you obtain them from an FDIC-insured bank or an NCUA-insured credit union.

Financial institutions offer a variety of term lengths, with the longer term often yielding a higher interest rate. The drawback is that you will have less access to those funds.

Terms of Certificate of Deposit Accounts

There are no specific types of CDs, but different term lengths are offered. Most of the time, you can choose a CD for a term of:

• 3 months
• 6 months
• 9 months
• 13 months
• 1 year
• 2 years
• Up to 5 years

The longer you commit to keeping your money in a CD, the more money you will be able to earn through the higher interest rate paid to you.

When Should You Use a Certificate of Deposit Account?

There are several benefits to using CDs to build financial wealth. Here are some key things to keep in mind:

• Interest rates are higher: Most of the time, the interest rate paid on a CD will be higher than traditional and high-yield savings accounts. That means you’ll earn more money using these accounts over others.
• The earnings are guaranteed: One of the nice things about CDs is that the amount you earn is guaranteed no matter what occurs in the market. That means you have a very predictable rate of return, which is one of the best ways to avoid the volatility of market conditions.
• They are more secure than stocks: CDs do not carry the same type of risk that stocks do, which makes them a popular choice for many consumers who do not want a lot of risks.
• Insured: As long as you open your CD through an FDIC-insured or NCUA-insured financial institution, they are protected from loss.

The biggest drawback to remember with these accounts is that you can only access the funds after the specified period, or you will incur significant fines or penalties. That can mean that these funds are not as accessible to you as you may expect in emergencies. Putting your money away like this could mean saving those funds faster with less temptation to spend the money.

Remember that while they offer a higher interest rate than typical savings accounts, CDs do not earn as much as stocks and bonds over time. Those financial instruments carry a higher amount of risk, though.

Key Certificate of Deposit Account Terms

Here are some important terms to know associated with CDs:

• Term: The term of the CD is the length of time that the money is put away to earn. This can be as little as 3 months or as long as 5 years. You can choose what works for your needs.
• Interest: The interest rate is the amount of money that you will earn on the funds if the money stays there for a set amount of time.
• Principal: This is the amount of money you add to the CD at the time of opening it. You can have more than one, but you typically only add money as a lump sum payment when you open or rollover the CD.

Evaluating Different Certificate of Deposit Accounts

Choosing the best financial institution to open a CD at will require comparing several things, including:

• The rate of earning: This is typically related to the amount of interest that can be earned. Compare several financial institutions to determine which offers the best rate and the term length that can help you earn as much as possible.
• Fees: There are often only fees associated with these accounts when you withdraw funds from them before the term ends. This can be an early withdrawal penalty which can negate any improved value.
• Insured: Be sure to choose to open a CD through an FDIC or NCUA-insured financial institution to ensure your funds are protected up to $250,000.

As you consider all the options available to you in savings vehicles, CDs could be a good option. If you are okay with putting your money aside for a set period, you can earn more significant interest from these accounts. You can renew those accounts for another term if you want to continue growing your savings.