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What Is a Certificate of Deposit Account?

CDs provide a slow, steady way to grow your money. 

Certificates of deposit, or CDs, occupy a middle ground in the investment world. They offer a guaranteed interest rate in exchange for keeping a specific amount of money in the account for a set period. Typically, CD accounts offer better interest rates than traditional savings accounts, and they’re less volatile than stocks or bonds, though the returns are lower. CDs are easy to open, and you can find options at most financial institutions. 

 

Elements of a CD

There are three elements in a CD account: 

  • Principal: The lump sum of money you deposit. 
  • Term: The length of time you agree to leave the money in the account – anywhere from several months to several years. 
  • Interest Rate: The guaranteed rate your principal will grow over the term. For example, if you deposit $2,000 for five years with a 2% annual percentage yield, you’ll end up with $2,208.16 once the CD matures. 

What happens when a CD term ends?

At the end of your CD term, you have three options: 

  1. Withdraw the money completely. 
  2. Roll it over into a new CD at the same financial institution. 
  3. Move it to another account. 

The choice depends on your financial goals. 

 

CD Advantages

With higher interest rates, guaranteed returns, and federally insured protection, CDs are a low-risk investment option. According to NerdWallet’s Spencer Tierney, this makes them a great choice for those close to retirement, or for anyone looking to protect and grow savings for a specific future purchase, like a car or home. 

 

CD Disadvantages

A CD locks away your money for months or years, meaning you won’t have immediate access to it. If you need to withdraw early, you’ll generally pay a penalty. Additionally, if interest rates rise, you won’t benefit from that increase during the term of your CD. If you’re seeking more aggressive investments for faster growth, CDs may not be the best option, as their returns are generally lower than stocks or bonds.

 

Interested in opening a CD? 

Check out our competitive rates and open a CD by visiting your local Five Star Bank branch today. 

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