What Are Bank CDs?
After looking into different savings options, you may be wondering, "What are bank CDs?" CD stands for certificate of deposit, and bank CDs can be excellent vehicles for earning reliable returns on your savings.
What "Certificate of Deposit" Means
A certificate of deposit is a type of savings account that guarantees a certain rate of interest. Each CD has a term that can range from a few months to several years. At the end of the term, you can take out your money and the interest earned. CDs are usually insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, as the Wall Street Journal notes, just like checking or savings accounts. So they're a good place to keep your savings.
While CD interest rates are somewhat higher than those of checking or money market accounts, not all CD rates are the same. Start by comparing the annual percentage yields (APYs) for any CDs you're thinking about opening. The APY tells you what percentage of your deposit you'll earn in interest over the course of a year. As long as the other details, like the minimum deposit and term, work for you, choose the CD that pays the highest rate. There are also CDs that allow you to "step up" or "bump up" to a higher rate at some point during the term.
Check the Minimum Deposit
Different CDs have different requirements about the amount of money you need to put into the account. For many CDs, the minimum is a few thousand dollars, but there are even accounts that require tens of thousands of dollars. CDs with higher minimums often pay better rates. Before you decide on a CD, make sure you're comfortable with the minimum deposit. Once money goes into a CD, it can't be easily taken out. Make sure you have enough cash in your regular checking and savings accounts to cover an emergency expense.
Check the Length of the Term
If you withdraw money from your CD before the term is up, you'll pay a fee. So choose a CD whose term is in line with your savings goals. If you're saving up for a purchase you're going to make in six months, for example, you'll want a CD with a term of a few months rather than a year or more. But if you want to keep savings in a CD far into the future, try to find a CD with a longer term – they usually pay better rates than shorter-term CDs.
With a range of savings and investment vehicles available to you, the variety of CD options and their relative safety make them well worth considering.