Did you know there are alternative ways to grow your money than with a traditional savings account? While savings accounts are a common and safe option, your typical savings account may not offer the most competitive interest rate out there. No, you don't have to risk your hard-earned money in the stock market. A certificate of deposit (CD) account can be a great way to cash in on higher interest rates to grow your savings faster.
How CDs work
CDs are a secure and straightforward savings option that offers a fixed, competitive interest rate for a specific period, helping to increase your initial deposit (the principal) over that period. This means you’ll want to have a good chunk of money saved to go into a CD since you typically can’t make additional deposits after the term begins.
By committing to leave your money untouched in a CD for a set period, you can earn significantly more interest compared to your average savings account. This makes CDs a great option if you're looking to maximize your savings without taking on risk like with other investment options. CDs work best for setting aside a chunk of savings you don't need immediate access to, such as emergency funds or savings for a home. You should plan not to touch your principal until the term ends since fees may apply to early withdrawals.
Why they're safe
CDs offered by financial institutions that are members of the Federal Deposit Insurance Corporation (FDIC) are protected by FDIC insurance. This means that your CD investment is insured for up to $250,000. In the unlikely event of a bank failure, your investment is protected up to this limit.
Interest rates explained
How much you earn with a Certificate of Deposit (CD) depends primarily on the interest rate or annual percentage yield (APY), the length of the term, and your principal. The higher your APY and the longer the term, the more your principal grows. When you open a CD, you agree to leave your money untouched for a specific period, and in return, your interest rate is guaranteed to remain constant for the entire term.
There are pros and cons to having a locked-in interest rate. While you're protected from interest rate drops, you can't take advantage of rising rates without incurring early withdrawal penalties. CD rates can vary, so make sure to shop around before committing.
Use our CD calculator to determine how much your money could grow in a CD. Adjust factors like principal, interest rate, and term length, giving you a clear picture of how your money can grow under different scenarios.
Navigating CD terms
It's important to choose a CD with terms that align with your goals. When browsing CDs, pay attention to the specified terms for each offer, including:
Minimum initial deposit—This is the amount of money required to open a CD. The CDs offering competitive APYs may require a higher initial deposit in return.
Term length—This is how long your money will remain in the CD. Terms can range from a few weeks to several years. When choosing your CD term length, remember that your APY is locked in for the entire term, meaning you could miss out on better offers if rates increase.
Keep in mind that for most CD types, you shouldn’t touch your savings until the term ends. Otherwise, you may receive a penalty for early withdrawal.
