You’ve made a plan to save, you’re saving automatically each month, and your saving account has started to grow. So where do you keep your savings? One of your options is a CD. If CDs are new to you, here are some answers to six common questions about saving with a CD.
A CD, or certificate of deposit, is a type of investment that often offers a higher interest rate than traditional savings accounts. Unlike other investments, most CDs are insured up to $250,000 by the Federal Deposit Insurance Corporation, so they carry little risk and you can count on the promised interest rate.
Credit unions offer the same product, but they’re called share certificates. They are insured up to $250,000 by the National Credit Union Administration.
2. How do CDs work?
When you purchase a CD, you commit to invest a fixed amount of money for a fixed amount of time. These time periods are often five years or less. In return, the issuing bank or credit union pays you a set amount of interest, which you receive when you redeem your CD at the end of the term.
3. What kind of interest rate can I get with a CD?
If you need your money before the fixed amount of time, or before the CD matures, you may have to pay a penalty, usually about three to six months’ of interest. The penalties can sometimes even mean that you may pay more than you have earned.
5. What’s a CD ladder?
You may have heard of a strategy called laddering. The idea here is that some money becomes available every few months or years if you need it. The way it works is you invest in multiple CDs with different terms, maybe one year, two years, and three years. Once the first CD matures, you put it in a new three-year CD. Repeat this process, and you’ll have a CD maturing every year if you need to access some of your savings.
6. What should I look for when selecting a CD?
Before you select a CD, be sure you know:
When the CD matures
What the CD’s interest rate will be, and if it could change, called a variable rate
How you’ll be paid
If the CD automatically renews after maturity, and if so, what your window of time is is for redeeming your CD
For more advice on selecting the right CD for you and what you should know before investing in a CD, check out this resource from the U.S. Securities and Exchange Commission.
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