The CD: A User's Guide

The CD: A User's Guide

You want your money to work FOR you, but even interest-bearing savings accounts are hardly providing more than 1% interest. Another alternative? Certificates of deposit, otherwise known as CDs.

The scoop:

What’s a Certificate of Deposit?

A certificate of deposit, or CD, is an investment that provides higher returns than a regular savings account. In exchange, you commit to locking your money up for a set amount of time. CDs exist for many different terms, anywhere from three months to five years. There are penalties for breaking into the money before the term expires.

Interest Rate and APY?

The interest rate is, simply, the rate at which you’ll earn interest, but the APY (annual percentage yield) is usually a higher number because it takes into account the effects of compounding. Basically, the more money you earn, the more you have to earn interest on. CD issuers will promote both figures.

Short- or Long-Term?

When you take out a CD, you lock yourself into one interest rate for the whole term. If you take out a CD and then rates drop, you got in while the getting was good—but if rates rise in the meantime, you’re stuck with the rate you signed up for.

What’s Best for YOU?

Think about how soon you’ll need the money and whether you think interest rates will go up or down. In this economy, odds are that rates can’t go down too much further. As a result, you might not want to lock yourself into a CD for too long a term.

When Is a CD Not Enough?

Sometimes, 2% interest just doesn’t cut it. For those times, there’s the stock market. To learn more about starting a portfolio, click here.

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