A certificate of deposit (most commonly known as a CD) is a type of savings account offered by financial institutions like banks. This special type of savings account earns a higher interest rate than a traditional account. CDs are FDIC insured, which means your money is protected up to a certain amount. There are several reasons why you may need a CD. Take a look at a few possible reasons why you may want to get a certificate of deposit below, as well as how to choose a CD below.
To save for a specific goal
If you have a specific goal in mind, such as saving for a down payment on a house or a new car, a CD can be a great way to save money. CDs have a fixed interest rate and a fixed term, so you know exactly how much money you will earn and when you will have access to it.
To earn a higher interest rate
CDs typically earn a higher interest rate than traditional savings accounts. This is because CDs are considered to be a more stable investment than savings accounts. Therefore, if you are looking for long-term growth of your deposited money, a certificate of deposit can be a good investment.
To have a disciplined savings plan
With a CD, you are not able to withdraw your money early without penalty, which is actually a good way to stay committed to a savings plan. This can help you to stay disciplined with your savings and reach your financial goals sooner.
How to Choose a CD
When choosing a CD, there are a few things you need to consider:
- Interest rate - The interest rate on a CD is the most important factor to consider. Compare the interest rates offered by different banks and credit unions to find the best deal.
- Term - The term of a CD is the length of time you will agree to keep your money in the account. CDs typically range from several months to several years. Choose a term that fits your financial needs and goals.
- Early withdrawal penalty - Most CDs have an early withdrawal penalty if you withdraw your money before the term is up. The penalty is usually a percentage of the interest you have earned. Be sure to understand the early withdrawal penalty before you open a CD.
A CD can be a great way to save money for a specific goal, build wealth, or even protect your money from inflation. When choosing a CD, be sure to compare important attributes and talk openly with the financial institution to find the best option for you.