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Certificates of Deposit: An Introduction to CDs

You’ve probably heard of them, but what exactly are CDs—or Certificates of Deposit?

In a nutshell, Certificates of Deposit are bank accounts that pay you a higher interest rate than traditional bank accounts in exchange for locking away your money for a fixed period of time.

Here’s a general breakdown of CDs and how they work.

How do CDs Work?

When you open a CD, you are agreeing to let the bank use your one-time deposit for a fixed length of time. So, what’s in it for you? In exchange for allowing the bank to use your money for that agreed-upon amount of time, the bank rewards you with a higher interest rate than you would typically receive if that money was kept in a traditional bank account.

When you choose a CD, you also choose the term length—or the specific time frame for your money to reach maturity. Typically, the term length of a CD ranges from three months to five years. In general, the longer the term length of the CD, the higher the interest rate you will earn on your money.

Is a CD Right for You?

You could be an ideal candidate for a CD if you have money in savings that you won’t need access to for a while. A CD can be a great option if you have a large purchase in your future—such as a home or car—and would like to keep that money in an account earning interest until it is needed.

If you are on the conservative side with your finances and looking for a secure option—instead of taking the risks that come with stocks and bonds—a long-term CD can be a good, safe choice.

In addition, a CD could be a perfect fit if you are approaching retirement or are already enjoying your retirement and want to keep your savings in a safe, low-risk account while still earning considerable interest.

Benefits to Opening a CD

A CD is seen as an excellent long-term savings tool. In addition to receiving a higher interest rate, CDs are regarded as one of the safest options for saving money.

The major benefit to a CD is that you can’t lose money on this type of account like you can with stocks and bonds. The Federal Deposit Insurance Corporation insures CDs up to $250,000 for an individual account or $500,000 for a joint account. With CDs you also have a predictable interest rate, which is something you won’t find with most other investment options.

You may also find that the early withdrawal penalty on a CD provides the motivation needed to keep that money in the CD instead of spending it.

Things to Consider Before Choosing a CD

Speaking of withdrawal penalties: The main downside to a CD is that if you do need to take out your money before the end of the term, you will likely pay a penalty. That early withdrawal fee can be a significant amount, and you will want to make sure you are aware of those details up front. Before investing in a CD, you should feel confident that you won’t need the money before its maturity date—or that you are comfortable paying the early-withdrawal fee.

Also, other high-interest savings accounts do have the potential to be a better choice than a CD—depending on external market conditions. If, given current interest rates, you could earn more money without term requirements, it’s possible (though not likely) that opening a traditional savings account might be in your best interest—literally.

Sunrise Banks is Here for You

Sunrise Banks’ CD accounts can help you save with high rates of return.

If you are considering options for long-term savings, check out our website and contact us today. We will help you learn more about the different types of CDs, options for rates and lengths, and if a CD is a good fit for you.1

1) This post is for informational purposes only.  As individual circumstances vary, please research available products to ensure your needs are met.

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