So you’ve got a bit of money tucked away. Maybe it’s in a low- or no-interest savings account, or a checking account. You know it could be working harder for you. It may be time to consider what many people view as the foundation for saving – a CD.
A CD, or certificate of deposit, is a savings tool that pays an interest rate for a fixed period of time. The principal and any earnings will be insured the maximum FDIC coverage allowable by law, so the money is just as safe as it would be in a savings account. The difference? Generally, interest rates on CDs tend to run higher, and the rates are guaranteed for the life of the CD. The trade-off is the immediate access to the money. In most cases, banks impose a penalty for early withdrawal if you should need the money before maturity.
CDs are great tools when you want a savings product that is shorter-term than, say, your retirement savings, and when you want to keep risk to an absolute minimum. For example, you might use CDs to manage savings toward college expenses or a home purchase. Historically, CDs have required a minimum deposit of several thousand dollars. (A quick plug: Ally CDs, by contrast, are available with no minimum deposit.)
Getting started with CDs doesn’t have to be complicated. But as you take a closer look at your options, there are a few terms you’ll want to watch for and understand.
Compound interest –
A beautiful thing. When interest compounds, it is added to the principal, or initial deposit. That means that the next time your interest is calculated, your money will be earning. Compounded interest, as opposed to simple interest, can add a lot to your ultimate return on a CD. Interest on Ally CDs compounds daily.
The end of a CD’s life span. It’s important to understand how long you are committing your money, and what your bank will do when that time is up. You may consider what flexibility and options your bank provides you at maturity manage your money.
Withdrawal penalty –
Banks typically charge an early withdrawal penalty if a customer opts to remove money from a CD account before the end of the term. (Ally’s No-Penalty CD is an exception to that rule after seven days of funding your account.) When you make your selection, it’s important to understand what it will cost if you want your money back earlier than expected.
In short, CDs offer the safety similar to a savings account – but with higher interest rates to help you reach your goals faster. In upcoming posts, we’ll provide information on choosing the right CD for your circumstances and building a CD ladder – one strategy for making the most out of your CD.
Have another CD topic or question you’d like to see addressed? Please don’t hesitate to let us know, using the comment tool below. We want to make sure you have the information you need. That is, quite simply, why we’re here.