A certificate of deposit (CD) is one of the many options you have when it comes to saving your hard-earned money. According to Investopedia, it’s a type of savings certificate in any denomination with a fixed maturity date (e.g. months, years) and specified fixed interest rate.
When You’re OK Not Taking Money Out Until a Specific Date
When you start collecting interest on a CD, you will get a maturity date. This means that money cannot be taken out penalty-free until this date. You will be charged a withdrawal penalty for taking money out before the maturity date. The penalty depends on the maturity of the CD and what bank it is through.
When You Have a Specific Goal in Mind
If you have some extra cash you want to save for a wedding, house renovation, or a new car, putting your money in a two- to five-year CD is better than leaving it sit in a savings account. When shopping around, look at how much interest you will earn and compare the option you’re looking at with two others.
When the Rates Work to Your Advantage
When shopping for CDs, you’re going to want to compare about five different options as the rates can vary significantly based on length and the amount you put in. Find the rate that works best for your purposes, and avoid high withdrawal fees if you think you will need to take money out before the maturity date hits.
When You Can’t Afford to Be Risky
CDs are one of the safest investment options out there. They’re FDIC insured, meaning that your deposits are covered if your bank or savings association goes out of business. This is best when the money you’re trying to save can’t be lost.
Personal Finance Pointer: To counteract interest rate risk, consider laddering your CDs. This will allow you to reinvest any maturing CDs to increase your current income. Also, ensure that you do have enough in your savings that you can withdraw at any time, should financial hardships hit.