The letters “CD” can stand for several things. “Compact disc” – a flat disc containing data or music – is one of the more common associations. CD can also stand for certificate of deposit, a type of savings account. You’re probably familiar with compact discs, but you may not be very familiar with a certificate of deposit (CD).
What is a CD and how can you get the most out of it? This helpful guide will provide the answers to these questions and more.
What Is a CD?
A CD, or certificate of deposit, is a savings account that typically holds a higher fixed interest rate than a traditional savings account. In order to fully benefit from this higher interest rate, however, the funds must be left in the account for a specified period of time. When you open a CD, you’ll choose this period of time by selecting the term. At the end of that term, you reach the maturity date. Once your CD reaches maturity, you have a set number of days, typically ten, to withdraw the funds without penalty before the CD renews.
Typically banks issue CDs, while credit unions issue an analogous product known simply as a certificate (at PSECU) or share certificate at other credit unions. Certificates issued by credit unions are insured by the NCUA, the National Credit Union Administration.
Most CDs have a required minimum balance. PSECU, for instance, requires a minimum balance of $500 to open a certificate and earn dividends. Most financial institutions offer various term options, with the interest rate increasing the longer you agree to leave the money in the account. At PSECU, we offer terms as short as three months or as long as five years, so you can find a certificate that best meets your needs.
How Is a CD Different Than a Traditional Savings Account?
The main difference between these two types of accounts is that you can deposit and withdraw money freely from a traditional savings account. While you may have to retain a minimum balance at some financial institutions, you are not required to keep your money in the account for any fixed amount of time.
With a CD, you make a commitment to the minimum term. Your deposit is a pledge that you’ll keep the money in the CD for months or even years. If you don’t, you’ll have to pay a penalty.
Some people find they prefer having access to their funds restricted in this way. It provides some advantages, such as:
- Decreased likelihood of withdrawing for a spur-of-the-moment purpose
- Less ability to make other impulsive financial decisions, since access to the funds requires more planning
- Puts your money to work for you with higher interest rates
Why Should I Get a Certificate of Deposit?
People find CDs are the right fit for them for different reasons. One may be a need to instill fiscal discipline in your life. If you find yourself constantly borrowing from your savings account for unnecessary or unplanned purchases, a CD may help you get through a short- or long-term spending freeze by knowing that you’ll incur a penalty if you withdraw money early.
Another practical reason to get a CD is the increased rate of return on your deposit. The Annual Percentage Yield (APY) tends to be higher for CDs than for other savings accounts. For example, a $5,000 deposit in a 60-month CD that is compounded monthly and has a 2.5% APY could earn you almost $625 over its term. You rarely find that sort of return on a regular savings account.
How Long Do I Keep My Money in a CD?
Different financial institutions may offer CDs with different terms. At PSECU, we offer certificates with terms that range from three months to 60 months, or five years. You can choose the length that fits your needs. Generally, the longer the term, the higher the APY. When choosing a term, consider what may be coming up in your life that you’ll need the money for and choose accordingly. For example, if you know you’re hoping to use the money to redo your kitchen in three years, don’t choose a five-year term or you’ll face a penalty when you withdraw the funds.
Can I Withdraw My Money Before the Maturity Date?
You can withdraw your money from a CD before the maturity date. Keep in mind that you’ll have to pay a penalty, so you’ll want to think carefully before doing so. Make sure you understand the penalties you could face before you open a CD.
Open a Certificate at PSECU
Are you ready to make a short-term investment that will earn you long-term dividends? Then a CD may be the right choice for you. Contact PSECU to learn more about our certificates and see which term would work best for your needs. You can also talk to us more about whether a certificate or one of our other savings products is the best fit for you.
Find more tips for managing your money on our WalletWorks page.