Certificates of Deposit (CDs) provide a safe and secure way to build savings. This attractive savings tool allows you to lock in higher rates of interest over a fixed period – and get the assurance of deposit protection up to FDIC limits. Want to know if a CD fits your needs? Here is some helpful information to help you.
What is a CD?
Before you invest in a Certificate of Deposit, it's important to know what it is. A CD is a savings tool that offers a guaranteed rate of interest over a fixed period. Unlike savings accounts that allow you to withdraw money as you choose, CDs typically provide higher rates of return when you deposit money for a specific term – often from 3 months to 5 years. In general, the longer the duration of the CD, the higher the interest rate you’ll receive.
What are the reasons you need to save and when will you need the money?
The decision on whether to invest in a CD depends on the reason you need to save and when you need your funds. For example, if you’re saving for a down payment on a house and planning on buying in a few months, a CD wouldn't make sense. However, if you plan to buy a house in a year or more, a CD may be a great choice. If you’re thinking about saving for a purchase, check our Savings Calculator to help you determine how much to save to reach your goal.
In general, CDs don't make sense if you think you'll need to access the money before the term expires.
What is the interest rate?
Interest rates vary by bank and CD term. When investing in CDs, you need to think about what may happen with rates. If rates are rising, you may want to invest in a shorter-term CD because you may get a higher return later. Similarly, if rates are falling, you may want to invest in a longer-term CD to lock in higher rates. CD rates vary by financial institution so you'll want to shop around. Try our CD Comparison Calculator to see the difference between CDs with different rates and terms.
What are the fees?
Most banks don’t have fees to open CDs; however, most charge early withdrawal penalties. This means if you need to access the money before the CD matures (the CD reaches the end of its term), you’ll have to pay a fee. The amount of the fee will vary by bank. When shopping for a CD, it’s essential to ask what fees are involved if you need to access your funds before the CD matures. You can also ask if penalty-free CDs are available.
When does interest on your money compound?
CDs offer another advantage to help you save – compounding interest. Compounding means that interest earned is added to the balance in your CD. CDs may compound either daily or monthly.
How can you take advantage of the higher rates CDs offer without sacrificing liquidity?
One strategy savvy CD investors use is called laddering. Laddering involves opening multiple CDs with different maturity dates. Then when a CD matures, you have the option to take the money or invest in another CD.
Investing in CDs can be a smart way to reach your savings goals. If you have any questions about CDs, we’re here to help! You can view current rates here or stop by any of our convenient Connecticut or Rhode Island locations to learn more.