Financial Basics: How Certificates of Deposit Work

Certificate of Deposits Form

When you think of investing, you may think of stocks, bonds or 401(k)s. However, there are lots of options for investing, including short-term investments. A certificate of deposit (CD) is one of them.

CDs are low-risk and offer a higher interest rate than traditional savings accounts, and you can choose the right term length to fit your short-term needs. Read on to learn more about CDs and what they can do for you.

What is a Certificate of Deposit?

According to the U.S. Securities and Exchange Commission, a certificate of deposit is a savings account that holds a fixed amount of money for a fixed period of time. Typically the term for a CD is between six months and five years. At the end of the term, you receive both the original amount you invested plus interest or you can choose to renew the CD for a new term.

During the term of the CD, you typically cannot withdraw from the amount you invested without paying a penalty fee. For example, if you set up a five-year CD and want to withdraw from your investment after three years, you will pay a fee for doing so.

What are the Different Kinds of CDs?

As with other investments, there are various types of CDs you can choose from. Here are the main two:

  • Fixed rate – interest rate is the same over the entire term of the CD; most common type of CD
  • Variable – interest rate can change over the term of the CD; earnings depend on whether the interest rate goes up or down

What Are the Pros and Cons of CDs?

CDs are considered one of the safest investments because they have a guaranteed rate of return. Compared to a traditional savings account, the interest rate is also higher, which means more money earned in interest. If you choose a CD with a fixed rate, it’s also easier to project what your earnings will be beforehand.

On the flip side, there is typically less flexibility with a CD than there is with a traditional checking or savings account. It’s important to choose a length of time that you don’t anticipate needing to use the funds in the CD. You’ll also want to think ahead and plan out whether you want to end the CD or renew it when the term ends.

FDIC Coverage

CDs are FDIC-insured deposits and offer protection up to $250,000. Deposit accounts can have a variety of ownership scenarios to increase FDIC coverage. There are some useful tools available about FDIC coverage, and our staff is available to answer questions.

Why Choose Minster Bank for Your CD?

Minster Bank offers competitive rates for CDs and is also part of the IntraFi network, which offers coverage beyond the FDIC’s $250,000. To learn more about CDs at Minster Bank, visit our website by clicking below.

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