Certificate of Deposit Basics
A Certificate of Deposit (CD) is a savings product offering fixed interest rates for a specific term, typically 3 months to 5 years. In exchange for locking up your money, banks pay higher rates than regular savings accounts. CDs are FDIC-insured up to $250,000, making them extremely safe investments with guaranteed returns.
CD rates vary by term and institution, with longer terms typically paying higher rates. As of 2024, rates range from 4-5.5% depending on term and bank. Online banks generally offer the best rates. The tradeoff is liquidity - withdrawing before maturity incurs penalties, often 3-12 months of interest, potentially erasing all gains on short-term CDs.
CD laddering is a strategy to balance better rates and liquidity. Instead of one large CD, divide funds into CDs with staggered maturity dates. For example, split $50,000 into five $10,000 CDs maturing in 1, 2, 3, 4, and 5 years. Each year as one matures, reinvest in a new 5-year CD. This provides annual liquidity while maintaining higher long-term rates.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
In 2024, yes - 5% CDs beat most savings accounts and provide guaranteed returns. They're excellent for short-term savings goals or emergency fund portions you won't need immediately. Compare rates between banks.
You'll pay an early withdrawal penalty, typically 3-12 months of interest depending on CD term. This can eliminate all gains or even eat into principal on very short holds. Only invest money you won't need.
Keep 1-3 months expenses in liquid savings for immediate emergencies. Put the rest of your emergency fund in CDs (especially using a ladder strategy) for higher returns while maintaining reasonable access.
APY (Annual Percentage Yield) includes compounding effect and shows true annual return. APR doesn't include compounding. Always compare APYs. CDs typically compound daily or monthly.
Most CDs are fixed at opening - you can't add funds. Some banks offer 'add-on CDs' allowing additional deposits during the term, though these typically pay lower rates than traditional CDs.