What Is a Certificate of Deposit?

Learn more about CDs and if it's the savings account you need for your goals.

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Welcome back to another episode of no fear finance – this is a financial podcast dedicated to the new young adult who wants to learn about money but doesn’t know where to start.

Announcement

Before I get started on this week’s topic, I wanted to let you all know about an award that I’ve entered and I’d be so grateful if you all could help me win by voting for me! The PLUTUS Awards is an annual award honoring financial literacy creators. I’ve put this podcast under Best New Personal Finance Podcast as well as Best Generational Financial Literacy Content. It would be an honor to win this and have my podcast shared with more people! I do this podcast to share what I wish I had known about finance before being an adult and I want others to benefit from what I’ve been doing. To vote for me you can find a link in the show notes – the link for my podcast is already filled out so all you need to do is put in your own personal info! Please only vote once as IP addresses will be monitored. Voting ends on July 15th. Also, make sure that you follow PLUTS on social media – they have great financial content that I think you’d like. And make sure you vote for other financial creators in other topics! I know I’ll be voting for PPC Ian, Our Rich Journey, and the Minority Mindset! Thank you all so so much for your constant support! 

And now back to our normal show – 

What is a Certificate of Deposit?

A certificate of deposit, also known as a CD, is a type of savings account that has a fixed rate, fixed term length, and fixed date of withdrawal. This fixed date of withdrawal is also known as the maturity date. They traditionally have higher rates than traditional savings accounts. To account for this higher rate, the money in a CD is held there for a certain term, or period of time. Due to this, you don’t have easy access to your money. 

The best way to understand a CD is to understand how they are different than a traditional savings account. If you are new or need a refresher, I covered Traditional Savings Accounts in a previous episode. 

CD’s can have higher rates than traditional savings accounts. Just like savings accounts though, they are federally insured and are a very low-risk place to keep your money. 

In a traditional savings account and high yield savings accounts, the rates can change over time. One day you might have one rate and the next it could change. In a CD though, the rate you have when you make the account is the rate that it will be for the entire period. 

In a traditional savings account, you can access your money when you need it. In a CD you do not have this option. You can withdrawal your money in a CD after the term date ends with no penalty. You could potentially withdrawal your money early, but there will be a penalty. 

When your term period ends, you have around a week to withdraw your funds. If you don’t then the CD may automatically renew for the same terms that you’ve had before. 

For CD’s the average rate for a 5-year CD is around 0.27% compared to a traditional savings account which has an average rate of 0.06%. In a high yield savings account, you can get a rate as high as 2% potentially. 

Choosing a Certificate of Deposit

Many banks have CDs that you can sign up for online. Let’s look at a few together to see what you should look for when choosing a CD. 

At the Bank of America, you can sign up for a Standard Term CD account. You need a minimum of $1,000 to open up this account. You can choose your term length on this account and depending on what you choose, your interest rates will be different. You can open up a 1 month CD with less than $10,000 in this account and your rate will be 0.03%. If you choose 10 years, with less than $10,000, your rate will be 0.75%. It would be wise to do the longest amount possible. You cannot deposit any more money into this account until it has reached its maturity. If you need to withdraw your money early then there will be a penalty. 

Let’s compare this to a CD with Discover Bank. To open up this account, you need at least $2,500. For a 10 year term, your interest will be 0.60. You’ll earn $154 in interest in this 10 year period. The lowest term amount at Discover is 3 months and your interest rate will be 0.20% – earning just $1 in interest. There is a penalty if you want to withdraw your money early. 

When choosing an account you want to find an account with the lowest amount needed to open and the highest rates if you are considering a CD. Decide if keeping this money in this type of savings account for the maximum amount of time will be good for you though. Could you get a better interest rate in a high yield savings account? Will this help you save your money and keep you from spending it? Do you have savings in another account to cover an emergency or an upcoming financial goal that you have? These are things you want to ask yourself. 

Positives

There are two positives when it comes to CDs. 

The first is there is a guaranteed return at a very low risk. You know your interest rate when you start and it will not change. 

Second, it is a safe place to save your money for future use. 

Negatives

Some drawbacks to CDs are that while they are safe and have a stable rate if you get a low rate CD you might miss out on some extra money. As rates go up and down you won’t be as affected, which could be good but could also be bad. 

Your money is also not liquid. You will not be able to access this money for an emergency or for everyday savings. 

How to Use 

Compared to a high yield savings account, a CD may be a good option for you. 

You’ll want a CD if you want to protect your savings in a low-risk account with guaranteed returns, but don’t need access to your money until the end of the term. 

If you are in High school or college and have been given a large amount of money, a CD could be a good option. It might allow you to save your money and not be tempted to spend it! I know when I was in high school and college that it was harder for me to save money when I knew I had it. A CD will force you to not spend that money. It won’t grow as much as it would in a high yield savings account though. I wouldn’t use this account if you need money in the near future though like for an upcoming trip or for your college savings. 

If you are an adult, you might want a CD for a similar reason. You want to save money in a low-risk account and you want to not touch it. I would not recommend putting your emergency fund in this type of account. Because this money is not as liquid as other savings accounts, it’s not the best if you need money in the next few years. 

I personally do not have a certificate of deposit account. I find that using a high yield saving account gives me more interest on my money and I am not tempted to touch this money. I also like not having my money tied up in something over a 5 year period for example. If there is a true emergency, it will be tough to get the money in a CD without paying a penalty. 

Wrap Up 

Let me know, do you have a Certificate of Deposit? If you don’t have one, why not? 

Thank you for listening to No Fear Finance, an Amalfi Media show. Make sure to check out the other Amalfi Media content because we have something for everyone! Thank you to everyone for the constant support! 

Until then, have a great week and see you all on Monday. 

Sara

Sara is a Content Portfolio Specialist on-site at Eli Lilly & Company. She is a professional librarian, Accredited Financial Counselor candidate, and adjunct instructor teaching personal financial literacy. Sara enjoys traveling and cooking!

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