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7 Things Every Investor Should Know About Certificates of Deposit (CDs)


As interest rates, inflation and market volatility climb, you may wonder how to protect your savings and earn more. While certificates of deposit or CDs aren’t the most exciting investments, they’re predictable and safe, making them an excellent option to stash cash for a period, depending on your financial goals.

Here are seven things every investor should know about CDs.

1. CDs are time deposits.

Time deposits are funds you can’t withdraw from an account before a specified time, known as the maturity date. You’re typically penalized for taking money out of a CD early. So, it’s generally best to buy CDs only when you’re sure you won’t need the money until after maturity.

In exchange for giving up access to your money during a CD’s term, you may receive higher interest than with other bank accounts, such as savings or money market deposits. You get a guaranteed return, no matter what happens in the economy.

2. CDs have different terms.

CD terms range from several weeks to ten years, with longer terms yielding the highest rates. You receive your principal deposit plus accumulated interest when the term is over.

You can use a CD interest calculator to determine how much you could earn with different CD products and compounding scenarios to reach your goals.

3. CDs typically come with insurance.

Many CDs are similar to bank accounts in that they’re covered by FDIC insurance or NCUA (National Credit Union Administration) insurance if purchased from a participating institution. Both types of federal insurance protect you for up to $250,000 per depositor, per insured institution, for each account ownership category.

For instance, your deposits are covered if you have $50,000 in a savings account and $200,000 in CDs in your name. But amounts in your name above $250,000 would be at risk if the institution went out of business.

You can spread out deposits and CDs at different insured institutions to ensure you always have FDIC or NCUA coverage. And if you have joint accounts, such as with a spouse, partner or relative, that’s an additional ownership category, giving you another $250,000 of coverage.

4. There are different types of CDs.

The three main types of CDs are brokered, standard and specialty products.

Brokered CDs are offered by a brokerage instead of a bank or credit union. They may have higher minimum deposit requirements, such as $10,000 or more. Brokered CDs can potentially generate higher returns than bank CDs based on the underlying investments—but they don’t come with FDIC insurance.

Standard or traditional CDs allow you to deposit money for a set period, such as from 28 days to ten years, and earn interest. When the CD matures, you can withdraw your initial deposit and the interest earned or roll it into a new CD.

Specialty CDs also allow you to deposit money and earn interest but have extra features, such as:

  • Add-on CDs allow you to make additional deposits to a fixed- or variable-rate CD.
  • Callable CDs give the bank the right to “call” or buy back a CD after an initial period and before the term’s end.
  • Jumbo CDs require a deposit of at least $100,000 and typically offer higher interest.
  • No-penalty or liquid CDs allow you to withdraw money before maturity without a penalty.
  • Raise-your-rate or bump-up CDs give you a fixed rate with the option to increase the rate once or twice during the term to take advantage of rising interest rates.
  • Step-up CDs give you a fixed rate for a period and automatically increase to a predetermined rate.
  • Step-down CDs give you a fixed rate for a period and automatically decrease to a predetermined rate.
  • Variable CDs pay an interest rate based on an index such as the Treasury bill or prime rate.
  • Zero-coupon CDs pay interest only at the end of the term and don’t allow the option to withdraw interest.

5. CDs can be “laddered.”

CD laddering is a common strategy for buying multiple products with different maturity dates and interest rates. Each rung on the ladder represents a separate CD with a progressively longer term. That helps you take advantage of rising rates over time, maximizing potential earnings while keeping your savings liquid.

If you have $100,000, with a laddering strategy, you might buy five CDs instead of one. For instance, you could put $20,000 in a 1-year CD, $20,000 in a 2-year CD, $20,000 in a 3-year CD, and so on, up to a 5-year CD.

After one year, when the first CD reaches maturity, you can use all or a portion of the money to purchase another 5-year CD. So, as your shortest CD matures, you use it to buy a longer-term CD that presumably has a higher interest rate.

Laddering protects you from missing higher returns if rates rise. You earn more money and get greater flexibility. As each CD matures, you can renew it at the current rate or use your money for something completely different.

6. CD rates get expressed differently.

When shopping for CDs, you may see their interest rates expressed as APY and APR. Be sure you make an apples-to-apples comparison.

APY, or annual percentage yield, is the rate you’d receive if all the interest you earn is added to your balance or compounded. In other words, APY is the rate you get if you never withdraw interest from a CD.

APR, or annual percentage rate, is the rate you’d earn without considering the effects of compounding in that year. It’s the rate you’d receive if you withdrew every penny of interest and didn’t allow it to compound. When you see a CD rate that doesn’t specifically say it’s the APY, assume it’s the APR.

7. CDs help you achieve financial goals.

The most common reason to buy CDs is when you have a relatively large amount of cash you want to keep safe while earning more than with a savings or money market account. They’re great for short- and medium-term financial goals, such as buying a home or car in a few years.

However, CDs aren’t the best place to fund long-term goals, such as retirement or a child’s education, because you may not keep up with inflation or reach your goal. Other downsides include paying a penalty for withdrawals before maturity.

If you’re worried that interest rates might rise after you buy a CD, consider one of the specialty types, such as a raise-your-rate or a step-up CD. They’re designed to ensure you don’t miss out on a higher rate later.

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