Certificate of Deposit Accounts

CDs are a low-risk investment that can help grow your money — as long as you’re willing to leave your funds in the account until it matures. CDs typically provide higher interest rates than savings accounts, and the rate is determined before you invest your money so it’s guaranteed.

CD Account Terms

Different types of CDs are available from financial institutions and offer a wide range of maturities and rates. If you think you might need your money before the CD’s term is up, this might not be a good option — you’ll be charged a penalty for early withdrawal. Common CD term options include three-month, six-month, one-year, three-year and five-year accounts.

To find the right CD for your financial goals, consider two important factors in addition to the term length: Find out the annual percentage rate or APR, which translates into your simple interest rate. Also find out the annual percentage yield or APY, which is the amount of interest the CD will earn over its entire term. See the latest CD Rates here.

When it comes to CDs, there are two basic options for length: short-term and long-term. You can chose between short-term and long-term CDs depending on how long you want to leave your funds in the account. You can find CDs with a variety of maturity dates ranging from a couple of months for to several years.

Short-Term CDs

Short-term CDs are available in different terms that usually range from a few weeks to a few months. Although short-term CD rates are typically lower than long-term rates, they will still likely earn a higher interest than a savings account. If you want to keep your money liquid, a short–term CD account is probably the best choice.

Long-Term CDs

Although a long-term CD will get you a better interest rate, you’ll be tying up your money for a longer period of time than if you invest in a short-term CD. If you’re tempted by your savings, the penalty for taking out your money from a long-term CD might motivate you to leave the money alone. In addition, if interest rates drop across the board, you’ll earn more from a long-term CD you’ve already opened because you will have locked in your interest rate.

Specialized CDs

A number of different types of CDs are available to fit different financial goals. Options include traditional CDs and CDs you can bump up to the current interest rate if rates go up during your term. Following are the different types of CDs available.

Other CDs

Traditional CDs

Invest in a traditional CD and you’ll get a fixed interest rate on your funds until the account matures. When the CD comes to term, you can withdraw your money, renew the CD or reinvest the money in another CD.

Variable-Rate CDs

A variable-rate CD pays you interest on your account based on benchmark performances of an interest rate index or U.S. Treasury notes. If you opt for a variable-rate CD, you won’t have to worry if interest rates go up — you’ll get the higher rate. But if rates go down, so will yours.

Bump-Up CDs

If the interest rate goes up while your CD is still untouchable, some banks enable you to switch to the higher interest rate. Typically, a bank or credit union that offers this type of CD will allow you to “bump it up” once during the CD’s term, and the higher interest rate will apply until the CD matures.

No-Penalty CDs

If you plunk down your money in a CD and have a change of heart, some banks let you withdraw your balance — and any interest you’ve earned — for a specified timeframe after you fund it. If you want the security of a CD investment with some flexibility to access your funds, a no-penalty CD might be just the ticket.

Brokered CDs

A brokered CD is one that a brokerage offers to customers. Like mortgage brokers, CD brokers find you the best rates by researching a number of offerings. You’ll pay a fee for this research, but you’ll likely end up with a higher interest rate because a broker knows which institutions are competing for customers.

Callable CDs

Riskier than a traditional CD, a callable CD is one that your bank can recall after a set period. You’ll get your initial deposit back and any interest the bank owes you if it recalls the CD — and you’ll probably get a higher interest rate because of the added risk. Banks recall CDs when interest rates fall way below the CD’s initial rate.

Jumbo CDs

You’ll need a bigger deposit to open a jumbo CD — somewhere in the neighborhood of $100,000 — but you’ll make more money on it. You’ll not only have to come up with a bigger initial deposit for a jumbo CD, you’ll face more risk: Because the FDIC insures each account up to $250,000, if you invest more than that, you could lose money if the bank fails.

CD-Investing Strategies

You can maximize your returns on your CD investments by employing specific strategies. To watch your money grow even faster, consider one of these CD-investing strategies.

CD Ladders

Get the most out of your CD investments — and take advantage of benefits of both long and short terms— by creating a CD ladder. The strategy involves staggering your CD investments so you can get the higher earning power of the longer-term ones and still have periodic access to your money, penalty-free.

For example, to build a three-year ladder with $60,000, invest $20,000 each into a 12-month, two-year and three-year account. Once your 12-month CD matures you can either take your money out or renew it into a new, higher-rate, three-year CD to keep your ladder in effect. Do that again when your two- and three-year CDs mature and you’ll be maximizing your interest on autopilot.

CD Barbells

Much like a ladder, a CD barbell strategy involves investing in a number of CD accounts simultaneously. The one exception, however, is that when you employ a barbell strategy you invest only in long- and short-term CDs and skip the intermediate-term ones. You’ll increase your CDs’ average yield this way significantly more than if you bought only short-term CDs.

CD Bullets

Applying a CD bullet approach to investing is like dollar-cost averaging. For example, you could invest in a five-year CD the first year, then a four-year CD the second year —which will mature at the same time as the first one — and so on. Because you’re staggering your purchase dates, you minimize your risk of missing out on higher interest rates.

About the Author

Barri Segal has 20+ years of experience in the publishing and advertising industries. Writing and editing for all styles, genres, mediums, and audiences, Barri’s strong ability to recruit, hire, train, and motivate winning teams of writers and production professionals has led to consistent career progression. She has a Bachelor of Arts in English from Temple University in Philadelphia, Pennsylvania, and has engaged in a wide variety of continuing education courses in writing and literature.