CD investments: A certain future in an uncertain world

If you could gaze into a crystal ball, what would you see? Maybe a couple of kids, a house, that dream job. What about a comfortable nest egg?

When it comes to finances, CDs can help take the guesswork out of the future. A CD, which stands for certificate of deposit, is a type of bank account that allows you to save your money for a pre-set amount of time, called a term.¹

You choose this amount of time, which might be 6 months, a year or longer. After the time is up, you get your money back, plus some extra cash in the form of interest earned—guaranteed. CDs usually have a fixed savings interest rate. A fixed interest rate means your rate won’t change over time. It will show you the amount your money will earn for being stored in the CD.

A CD investment lets you know what you’re in for when you start. And just like the future, sometimes knowing what to expect (is that house a fixer upper?) can bring peace of mind and make it easier for you to plan.

CDs are considered among the safest investments, because they typically provide guaranteed growth, as long as you keep your money in the CD for the length of the term.²

CDs are just one type of the many investment options available today. With some investments, you might not know exactly how much your money will earn. If you have stocks, for instance, the market could fluctuate, meaning prices could go up or down. This, among other reasons, could cause the value of your stock to rise or fall.³ With a CD, however, you can tell right away how much your money will make. Since a CD can have a set rate, your return won’t fluctuate with the market. That means guaranteed returns.

Think of it like seeing your future in a crystal ball without any smoke or haze. Instead, it’s clear. That’s investing in a CD—you know what you’re going to get.

For some CDs, the answer is no. These CDs will pay your full interest at the end of your CD term. This might be six months, two years, five years, or anywhere in between. The exact terms that you can choose from will depend on the options available at your bank.¹ After this amount of time passes, you get your money back again. Say the CD has a term of one year. After one year, you can access your money and the cash it earned from interest.

For other CDs, you can receive interest on a monthly basis. This would only be the interest you earned that month, not the full interest that you would receive at the end of the term. You can even set up a transfer that will send your monthly interest to a checking or savings account.

It really depends on your specific CD so be sure to check with your bank.

You earn a percentage of your initial deposit for keeping your money in the CD. The exact amount of earnings you’ll receive is based on the CD’s savings interest rate.² This rate can vary, depending on the bank and type of CD you choose.

Say your CD has a savings interest rate of 2%. This means your money will earn 2% by the end of the term. If you put $10,000 in a 1-year CD with a 2% annual interest rate, after one year, the $10,000 could earn 2%, or $200. You would receive $10,200 back—an additional $200—for putting your money in the CD.

If you leave your money in the CD for the entire length of the term, you shouldn’t lose money in a CD. Once the term is up, you’ll receive the initial amount you deposited, along with the amount your money earned. But if you take your money out before that time, you might have to pay a fee, called a penalty. This penalty could cost you money and lead to a loss.

You might think of it as a type of savings account. A savings account is a way for you to store cash at a bank until you need it. A CD often has a higher savings interest rate than a savings account because you’re agreeing to set aside your money for a certain length of time.² With a savings account, you can access your money any time. With a CD, as a reward for storing your money for an agreed-upon time, the bank might offer you a higher interest rate.

To invest in a CD, you can start by looking online or going to a bank to ask for information. You might look at the rates and CD terms available and think about your savings goals. Once you decide which CD you want, you’ll need to share some personal information with a bank to open the account. Then you’ll put money into it, and over time your funds will grow.

When investing in a CD, you’ll want to have a certain amount of money that you don’t plan on using right away. A CD probably isn’t the place to put an emergency fund or cash you might need to grab quickly. It may also not be a good place to put the money you’ll need for groceries next week. That’s because the money gets locked away for the duration of the CD term. In exchange for not accessing your money, the bank rewards you with savings interest.

CDs are sometimes used as a way to save for the long-term. That’s because the money can be set aside and earn interest until later. You might want to set aside funds for several years, or even longer. You could be saving for retirement, a new car or a future trip—the choice is yours.

Like most things, it depends on your circumstances. Savings interest rates rise and fall, but with a CD you have a guaranteed amount of growth. You can see what you’ll get at the end of the term with your crystal ball. With a savings account, that crystal ball isn’t clear.

With some types of savings accounts, the rate can change after you make a deposit. It could rise or fall, which could be good or bad for your overall interest earned—but you can’t predict what will happen. With a CD, however, once you open the account and lock in your rate, it will not change. That can also be a good or bad thing. Say you choose a five-year CD with a savings interest rate of 3%. If interest rates later go up to 5%, you won’t make as much money as you could have in a savings account. But if they go down to 1%, you won’t be affected by the falling interest rate—you’ll still earn 3%.²

Before making a decision, it might be helpful to review the advantages and drawbacks of CD investments:²

Pros of CD investments

• Offers a low-risk savings strategy.
• Savings interest rates may fall after you get the CD.
• Helps you set up a savings plan with specific dates set for when you can have your money again.
• Can be FDIC-insured up to the allowable limits.

Cons of CD investments

• Higher risk options, such as stocks, could potentially earn more (but only if the stock market or company does well).
• Savings interest rates may rise after you get a CD.
• Doesn’t allow you to access funds before the time period ends.
• Can only insure up to a certain amount.

Understanding how investing in a CD works can help you plan. If you want to build up savings for the future, CDs can help the visions in your crystal ball become a reality. You might use CDs to lay the path for that dream car, a fixer upper or a long-awaited (and much earned) vacation.