What Is a Certificate of Deposit?

By | 2017-09-29T01:05:44+00:00 September 29th, 2017|Uncategorized|0 Comments

If you’ve been following our blog, then you might be a little confused as to what we’re going for. We talk about credit cards, finding time to blog, college personal finance tips, and just plain old credit score. So, we’re all over the place; however, this is a straight up personal finance blog! Adding to that, we’re just getting started for real; we have a lot of ground to cover.

So, in short, you can expect some random topics from time to time, but just trust us in believing they’ll be simple and about personal finance. Well, that’s my weird way of introducing our next topic: certificates of deposit, but you already knew that (could have come up with a cleverer, more convoluted title).

A certificate of deposit (CD) is like a weird savings account with a bank or credit union; more specifically, it’s a promissory note from said bank/credit union on a deposit. I’ll just go over the procedure with such an account, and everything should be crystal clear.

So let’s say you have $100,000, and you want to put it somewhere safe. So, you pick a certificate of deposit. You deposit the money with a bank or credit union, and like a savings account, they hold onto, secure, insure the money in your name. However, unlike a savings account, you can’t dip into it and withdraw money whenever you want.

Why is that? A CD differs from a standard savings account because it is a time deposit. This means that you cannot take out any money for some set time, but after that time is up, you can withdraw the money as you please.

A CD is considered “mature” when you can start withdrawing from it, and the time until maturity ranges anywhere from a two or three years to much longer. It can vary, but you’ll know how long you have by reading the terms and conditions. Why do they banks require this? It’s basically insurance that you won’t up and leave with all your money (also known as their business), and they provide a little bit of incentive to convince you it’s a good idea.

While the CD is maturing, it accrues interest just like a savings account. Larger deposits with longer terms generally come with higher interest rates. So after some set time, you could have a nice return on investment with whatever bank or credit union you work with. In other terms, they offer an annual percentage yield (APY) which is similar to APR but it works in your favor this time.

You would do well to know that although you “can’t” withdraw any money from a CD, you actually can withdraw money whenever you want. However, if you choose to do that, then you are required to pay a withdrawal penalty per the agreement. The value of a penalty will vary, but you can assume that your investment will suffer dearly if you break your commitment to a CD (if you really can’t handle not touching that money, just use a boring, old savings account).

So what’s the point? They’re the same as bank accounts, but you can’t touch them without a penalty. What’s up with that? Well, there are a couple good reasons for choosing a certificate of deposit.

They’re a much better investment than your standard savings account, especially if you’re throwing in a large chunk of change. They come with higher annual percentage yields, so you’ll make more money on that $100k if you’re patient. Also, think of it this way. You made $100,000, and you put it away for ten years. During that time, you didn’t buy anything ridiculous with that money, and after ten years, you’ll have even MORE money. Boom, it sounds pretty worth it to me.

Of course, putting away $100,000 for bedtime isn’t going to be a good idea if you need to pay for something expensive or emergency-like before it wakes up. So, you should be in a secure position financially before deciding to invest in a CD. It requires a bit of foresight and confidence, but it can literally pay off in the long run.

What would you want to use: a CD or a savings account? I’m a young guy. I don’t have any grand plans for a CD at the moment, but I’m sure it would be a good idea with more money on hand and better income at a later age (or if you’re young and have all that).

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