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What Are CDs and How Do They Work?

What Are CDs and How Do They Work?

Money Management
SouthEast Bank| May 31, 2024
What Are CDs and How Do They Work?

If you’re looking for a safe way to invest your money, you may be asking, “Should I open a CD?” The answer depends on your financial situation and investing goals.

Before you can decide whether a CD is right for you, it’s important to understand the basics of what certificates of deposits are and how they work. Read on to explore the features of CDs and better understand when and why they may be a beneficial choice.

What Is a Certificate of Deposit (CD)?

Certificates of Deposit, or CDs, are savings products offered by many financial institutions. When you open a CD, you agree to invest a certain amount of money for a specified time period in return for a fixed interest rate. Once this time period is over, you’ll get your money back plus interest. If you withdraw the funds before the agreed-to period, however, you face potential penalties.

CDs earn a relatively low rate of return compared to many other types of investments but remain a popular choice for those who have set aside funds they want to invest safely during a short season of time.

Certificate of Deposit vs Savings Account

For those unfamiliar with CDs, they are easily confused with savings accounts. So, what is the difference between a CD and savings account?

While high-yield savings accounts and CDs are both secure ways to store your money while earning a return, they have one main difference – the holding period. In most cases, if you have an emergency expense, you can withdraw funds from your savings account without a penalty. If you take funds out of your CD before the term is up, however, early withdrawal penalties may lessen your earnings.

What Are the Requirements of a CD?

Most CDs have a minimum to open, so you’ll be required to invest at least that amount to get started. Once your CD is set up, all that’s left to do is wait – then, at the end of the term, collect your earnings.

When you decide to open a CD, it’s important to research the best banks for high interest rates and choose a CD with an investment term that meets your needs. According to CNBC, most CDs require the holder to wait between three months and five years before withdrawing their money.

Here’s an example: Let’s say you open a 5-year CD with an interest rate of 1% and an initial deposit of $10,000. At the end of your waiting period, you’ll receive your balance back with interest, for a total of $10,510.10. Your interest earnings will total $510.10.

When Is a Good Time to Open a CD?

Here are a few situations in which a CD may be a good fit for you:

Before you open a CD, it’s also important to weigh the benefits and drawbacks to determine whether it’s right for you. Here are a few pros and cons of CDs:

Pros of CDs

Cons of CDs

Earn High-Interest Rates With a CD

One of the most important steps in opening a CD  is finding one with a rate and terms that fit your savings goals. When it comes to choosing the best possible option, start by choosing a reasonable waiting period based on your budget. Then, research financial institutions to determine which one offers the most competitive rate.

SouthEast Bank offers several CD promotions to help you maximize your money. Learn more using our online options or by visiting your nearest branch today.