If you’re new to investing, especially the Certificate of Deposit (also known as CDs) market, we will help you understand how they work for your money.

Banks issue certificate of deposits. You will usually find a higher rate with online banks. This is because they usually don’t run a brick and mortar store. This cuts back on a lot of expenses.

How CDs work

In exchange for your money, you will agree to term where the bank can hold your money for a set time period. Time periods usually range anywhere from one month to ten years. A majority of the time your CD will be set on a fixed rate, even though some banks may offer CDs with forms of variable rates.

When you open up a CD at either a branch or online, you will receive some type of “paper certificate” or receipt confirming that you have purchased that CD for a particular amount of time. This may show up your bank account statement as well.

Most bank institutions will allow you to have your interest periodically mailed to you via check or you may also have it directly deposited into your savings account.

When your CD is about to mature, you will receive a notice in the mail generally on the notice. If you do happen to forget about it and would like to retrieve the money, there is a “window”, where you may withdraw without a penalty fee.

If you do decide to withdraw before the CD matures, bank will process a penalty fee. For example, a five-year CD would generally lose about six months of interest if withdrawn early.

General Rules

• The higher the minimum balance is, banks tend to have a higher rate.
• The longer the term is, the higher the rate will be.
• Credit Unions and Online Banks tend to have higher rates than your local bank with branches.
• Personal Accounts will tend to have a higher rate than a business account.

When purchasing your first CD, it’s very important that you study the terms and conditions related to the CD. If you do decide to go to a local branch instead of opening an account online, employees tend to not know a lot of information in reference to a CD.

In the US, it is required by law that you receive the terms and conditions when investing into a CD. It is important that you store this information in a secure place at home. This way if something in the future comes up, you can reference it.

These are just the basics when it comes to learning about investing into CDs. CDs are a great way to make a nice return on your money, as long as you don’t need access to the cash for that period of time. Investing is always the key to success.