Certificates of Deposit (CDs)
A CD is a bank account where you agree to lock your money away for a set time. In exchange, the bank pays you a guaranteed interest rate.
What Is a CD?
CD stands for certificate of deposit. You choose a term, deposit money, and leave it untouched until the term ends. Your interest rate is locked in.
The simple version:
CD = a savings account with a time lock
You earn guaranteed interest, but give up flexibility
How CDs Work
Common terms include 3, 6, or 12 months. Longer terms often pay more, but not always.
Most CDs have a fixed APY that does not change during the term.
The Big Rule: Do Not Touch It
Early withdrawal usually costs money
Taking money out early usually triggers a penalty that can wipe out weeks or months of interest.
Example:
You open a 12 month CD but withdraw after 3 months. The bank may keep all interest earned so far.
When CDs Make Sense
You know you will not need the money for a specific period
You want a guaranteed return with no market risk
You already have an emergency fund
You want to prevent impulse spending
Are CDs Safe?
CDs at banks are usually FDIC insuredup to $250,000. The main risk is locking your money up, not losing it.
A Smart Strategy: CD Ladder
A CD ladder spreads your money across multiple CDs that mature at different times.
- $300 in a 3 month CD
- $300 in a 6 month CD
- $300 in a 12 month CD
- Reinvest or withdraw as each CD matures
Key Takeaway
CDs are best for money you truly do not need soon. They offer safety and guaranteed returns, but flexibility matters. If you need access, a high yield savings account is usually better.