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A certificate of deposit is an account set up for a specific amount of time. CDs range in terms. A term is the length of the CD and can range from a month to five years, in most cases. The longer the duration of term, the higher the interest, in general.
Your money must remain in the CD for the full length of the term. If you withdraw the money before the term is up, you will be charged a fee. Every bank here is different, so be sure to read the small print before signing up.
Once the CD term has been met, you will have a grace period where you can choose to either withdraw the money from the CD without any fees, or renew the CD. When you renew your CD, know that the interest rate may have changed since the first time you invested. It’s worth your time to investigate other banks and ensure you’re getting a high interest rate for your investment, both in time and money.
The CD you choose to invest your money in may have a minimum amount required to open the account. This can vary from nothing to $25k, or more. There are a few CDs that don’t require a minimum opening balance, but most require something. The higher interest rates are offered on accounts with a higher minimum opening balance or longer terms.
A CD generally earns higher interest rates because the money you invest in the CD is guaranteed to stay in the bank for a specific amount of time. The money you put into a savings account or a money market account can be withdrawn at any time without fee. A CD doesn’t have that same flexibility, allowing for the banks to offer higher interest rates.
All CDs offer some type of interest on the money you invest in the account. A CD through your typical bank will offer rates for a standard one year CD around 0.05%. A high yield CD can offer rates of a one year CD around 1.10% - some higher and some lower.
Let’s say you invest $5,000 in each of these accounts. Over the term of the CD, the money invested in your typical bank account will earn around $2.50 in interest for the life of the CD. The money invested in the high yield account will earn $55 over the life of the CD. Looking into CDs with high yield rates is worth the time and energy.
The rates listed here are for online banking institutions. The main difference between online banks and the typically brick and mortar banks you see around your community is that all the services can be done through the Internet. Most online banks also offer mobile banking to make your banking needs easier. Because these banks don’t have to pay for physical locations, their fees are typically lower and their rates higher. All of the banks listed are FDIC insured, so you don’t have to worry; your money is protected just as much as it would be in a traditional bank.
FDIC stands for the Federal Deposit Insurance Corporation. It is a government corporation of the United States of American. Investing your money in a bank that is FDIC insured means the money in that bank is protected up to $250,000. If the bank were to fail, your money would still be protected through the FDIC.
Banks are required to display an official FDIC sign at each teller window or station. Money invested in stocks or bonds is not covered by the FDIC. The accounts covered include savings, checking, money market, and CD accounts.
There are two main differences between savings accounts, money market accounts and CDs: the interest you earn, and your access to the money. It is smart to have money invested in all three different accounts.
A savings account is best suited for the money you need to have easy access to, but also want to save. This would be a great place to keep your “emergency fund” and money for specific savings needs. You can access this money whenever you, up to six times a month without be penalized. There typically is a low opening balance required, so you can open a savings account with whatever money you have set aside.
A money market account is very similar to a savings account. The main difference is the minimum amount required to open a money market account is, in most cases, higher. However, you gain the benefit of using checks with a money market account. If you need access to your account by using checks, an MMA is a good option for high interest and accessible funds.
A Certificate of Deposit account is best suited for money you can invest and leave in the account for an extended amount of time. CDs are set up to earn higher interest rates based on the length of time you can leave your investment in. This is a great option for money you can set aside for years and just allow it to grow interest and earn money. You can access the money if you need to, but you will be charged a fee if you withdraw it before the term is up.
The best way to decide which account to invest your money in is knowing what the money is going to be used for. If you are saving for retirement, a CD makes perfect sense as you’ll benefit from the long investment terms. For money you might need to use at any given time to cover car or home repairs, or other unforeseen expenses, a savings account or MMA are good options.