Certificate of Deposit: What is a CD?
July 31, 2019
A certificate of deposit, or CD, acts like a traditional savings account in that you deposit money to collect dividends over time. However, it differs from a traditional savings account because you cannot withdraw or deposit money at will.
Instead, you agree to place your money on deposit for a preset period of time, called the “term length,” during which you may not make withdrawals without a penalty. Because you trust your money with the credit union for a longer period of time, longer term CDs are likely to have much better rates than a savings account.
You can also deposit your money for as few as several months or as long as several years, but the longer you keep it on deposit, the better your rate will be (in most instances). Also, this rate is usually locked in, meaning it is not subject to change based upon how well the economy is doing at any given moment. If you’re willing to wait the time it takes to get your money back, we recommend considering CD options, as most offer much higher return rates than standard savings deposits.
What am I saving for?
If you’re saving for a rainy day fund, it’s likely you’ll need that money rather quickly. In this case, it would be best to not lock yourself into a long-term commitment since you’ll need the flexibility. But there are still plenty of options if this sounds like you! A short-term certificate, such as one for seven months, might be the perfect option. Wait a few months to finish paying for an unexpected expense, instead of waiting a few years if you were locked into a longer CD term.
In most cases, vacations or the purchase of a home are more flexible goals, making a longer-term certificate more appealing to you. A two-year term would earn you a better rate, and you could postpone your vacation or house hunt until you have the funds to pay for it. Long-term certificates also keep you from making impulsive decisions. If something seems like a “good deal,” you would be forced to weigh the penalty of early withdrawal against the potential savings.
What insurance do I have against loss?
At a credit union, the National Credit Union Administration (NCUA) or a private insurance corporation (sometimes both) will insure your CD for the same amount. The insurance works the same way, for the same amount, regardless of who provides it. Insurance for your money is applied automatically and requires no action on your part.
Is a CD right for me?
There are many reasons why a CD would be the right choice, but we encourage you to make the decision carefully to protect your financial success. CDs usually require a minimum deposit amount, so be sure to have enough savings left over to get you through until your CD matures. If you have trouble with impulse spending, CDs can also be a great solution to lock your savings away from yourself. They also make an excellent vehicle for an emergency fund. Using a technique called “laddering,” you can take advantage of the higher rates offered by longer-term certificates while preserving the flexibility of shorter-term ones. If you have the discipline to keep your money locked in a CD for its full term, you can seriously muscle up your savings without lifting a finger. Stop by Greater Iowa Credit Union to get more details on the option that’s right for you!
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