A Beginner’s Guide to Certificates of Deposit (CDs)
November 15, 2017 | WHITE ROSE CREDIT UNION | Financial Wellness
What is a CD or certificate of deposit? Where can you get them? How do they work? Why would someone choose a CD over a different type of savings strategy? This is our beginner’s guide to CDs.
What is a CD or Certificate of Deposit
Investopedia defines a CD as “a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements.”
Put in simpler terms, a CD is a safe, specialized savings product that offers higher interest rates in return for limited access to your funds. You deposit your chosen amount of savings into a CD, at an agreed-upon interest rate and length of time. Once the term ends, you have the option to either renew the CD at the current interest rate, or withdrawal your original funds with the added interest. Keep in mind that the longer the term is, the higher the rate of return will be.
CDs can also be referred to as ‘share certificates’ at credit unions.
Certificate of Deposit Example
If you have $15,000 to invest, and you choose to place those funds into a CD at White Rose Credit Union, here’s how it might play out.
Initial deposit: $15,000
Term: 48 months
When the 48 months are up, your final amount will be $15,459.81. You can then renew for another 48 months at the current interest rates, or withdrawal that amount.
In comparison, look at what your return would be if you only used a regular savings account at White Rose Credit Union.
Initial deposit: $15,000
There’s no time restraints on a regular savings account, but if you looked at your total balance after 48 months, it would only be $15,090.21. The CD provided a higher return, but you didn’t have access to your funds during those 48 months like the normal savings account.
Where to Open a Certificate of Deposit
You can open a CD or share certificate at most financial institutions including:
- National banks
- Regional banks
- Local banks
- Online banks
- Credit unions
Like with any financial product or service, only use a financial institution you trust. Feel free to compare rates and shop around before committing to any specific CD.
Pros and Cons of a Certificate of Deposit
- You earn a higher average rate of return than on a typical savings account.
- They are a safe investment option, insured up to $250,000 by the issuing financial institution.
- There are no monthly fees associated with most CDs.
- You forfeit liquidity for that higher rate of return. If you want early access to your funds before the end of the agreed-upon term, be prepared to pay an early-withdrawal penalty fee.
- Their interest rates are lower than other, riskier investment options like the stock market.
- There may be minimum deposit amount requirements to open a CD. For example, at White Rose we require a $500 minimum opening deposit for our share certificates.
Popular CD Investment Strategies
CDs are a great option for someone looking for a low-risk investment option who doesn’t need quick access to their funds. If limited access is your main concern with a CD investment, there is a strategy that minimizes this con. It’s called ‘laddering.’ Here’s how it works.
Let’s say that you have $15,000 to invest – like in the earlier example. Instead of putting all of the funds into one, 48-month CD, you can open multiple CDs at different intervals. You can put $5,000 into a 12-month CD, the next $5,000 into a 24-month CD, and the final into a 36-month CD. Then you’ll have an account mature once a year. This gives you the ability to take advantage of positive changes to the market, as well as having more flexibility with your funds.
A CD, or share certificate, is a useful investment tool for someone who appreciates a more secure investment option. They allow you to invest a specific amount of money at a fixed interest rate for an agreed-upon term length. If you don’t need flexible access to your savings, they are worth checking out.
Get More Financial Tips
Subscribe to our blog to get updates on popular financial topics and advice. Sign up now!
There are 0 Comments