How Do Certificates of Deposit (CDs) Work?

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A certificate of deposit, or CD, is a type of savings account with a fixed interest rate and maturity date. This type of account typically earns more interest than a regular savings account, making it a popular option for lenders to safely grow their money.

We put together everything you need to know.

How do CDs work?

A certificate of deposit is a low-risk time deposit offering an easy and secure way to stash savings. In return for higher interest rates, you commit to leaving your money in the account until its maturity date. Here are some of the benefits of how certificates of deposits work:

  • Security. If you’re someone looking for a safe investment, CDs may be the route to go. The Federal Deposit Insurance Corporation (FDIC) insures CDs up to the maximum amount allowed by law, minimizing risk and giving peace of mind to borrowers. 
  • Increased savings . Certificates of deposit are designed to maximize savings, regardless of what the market does, allowing your money to grow predictably.
  • Flexibility. The amounts and terms that accompany a CD are completely flexible—meaning that you can easily opt for shorter terms depending on how long you’d like to tie up your money.

A certificate of deposit is one of the most secure investments available, while also offering fixed rates, convenience and flexibility.

When should I get a certificate of deposit?

Certificates of deposit are a great way to maximize savings, but how do you know if the timing is right for you? Depending on your timeframe and financial goals, there are several indications of when you should open a certificate of deposit.

CDs appeal to investors who won’t need to touch their money until the end of the term, which is often 12 months or more. If you happen to be sitting on a lump sum of cash in a traditional savings account, and don’t plan to tap into that money anytime soon, putting that cash into a certificate of deposit would bring in better return.

It’s also wise to set up a separate emergency fund to draw from in case something unexpected comes along. This will allow you to avoid tapping into your CD and having to pay for early withdrawal penalties.

How much interest will I earn on a CD?

When it comes to a CD, interest rates increase with the term. So the longer the term, the higher the interest rate.

Annual Percentage Yield (APY) is a calculation based on balance, term, and frequency of compounding which can show you what you could earn in a year. All banks market their product’s APYs which makes it helpful in comparing CDs of different interest rates and compounding frequencies.

Below are examples of what you could earn for different terms, based on some sample rates:

Term
Annual Percentage Yield (APY)
Est. Earning 1 YR ($10,000)
12 months
0.25%
$25.00
24 months
0.70%
$140.49
36 months
1.65%
$503.21
60 months
2.25%
$1,176.78

Learn more about all our available certificate of deposit (CD) rates.

How much more could I be earning?

While savings accounts might give more flexibility when it comes to withdrawing your funds, CD accounts offer higher interest rates over time. The amount of interest you can earn depends on the APY, the length of the term, and the frequency of compounding. But the more frequent the compounding, the more your money will grow.

Are there ways to use CDs but stay flexible?

There are various ways to place funds in a certificate of deposit while still offering flexibility.

  • No-Penalty CD. If you are looking for an alternative savings plan with higher rates and flexibility, a No-Penalty CD is the way to go. Where traditional CDs are generally fixed terms that do not allow withdrawals without incurring an early withdrawal penalty, No-Penalty CDs give you the flexibility to close your CD during the term without being charged a penalty. This means you can withdraw without a penalty if rates happen to go up—given that it’s one full withdrawal.
  • CD laddering. A CD ladder allows you to set up multiple CDs to mature at staggered intervals, versus having to repeatedly renew a single CD that holds all of your funds. This will result in increased accessibility, more flexibility, better interest rates, and peace of mind for the borrower.

Learn about all of the available options for certificates of deposit.

How to start using CDs

At PurePoint Financial, we pride ourselves on empowering our clients to save more. Simply call our Client Support Center, or open an Online CD right from your computer, tablet or mobile device.

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