A Beginner's Guide to Certificates of Deposit

Personal Finance Education | 09.13.2023
If you want to learn more about Certificates of Deposit but don't know where to begin, start here!

This beginner's guide will provide you with an overview of what a Certificate of Deposit is, how it works, and the different factors you should consider when deciding which term is right for you.

What is a Certificate of Deposit?
A Certificate of Deposit, also known as a CD, is a type of savings account that offers a higher interest rate than a traditional savings account. A CD is a low-risk, federally insured savings account that may help you reach your financial goals. Unlike a savings account, you cannot withdraw funds from a CD before the maturity date without incurring penalties. A maturity date is the end date of a term.

When you open a CD, you agree to leave your money in the account for a specific amount of time, called the CD Term. This term can range from a few months to several years. The longer the term, the higher the interest rate typically offered. During this time, the bank pays you a fixed interest rate on the funds within your CD account. Once the term ends, you can withdraw the money, along with the accrued interest. However, if you withdraw the money before the end of the term, you will be charged an early withdrawal penalty. CDs offer a higher return on your money while keeping it safe and secure.

CDs are considered a low-risk investment option because they are insured by the FDIC (Federal Deposit Insurance Corporation), meaning that your funds are protected up to $250,000 per depositor, per insured bank. 

Benefits of Investing in a CD
Investing in a CD offers numerous benefits, especially for those who prioritize low-risk, predictable returns. First, CDs generally offer higher interest rates than traditional savings accounts, meaning that investors can grow their money more quickly. Second, CDs provide guaranteed returns, which can offer peace of mind for those who want to protect their savings from market fluctuations. Additionally, CD accounts are FDIC-insured, meaning that they are a safe and secure investment option. For those looking for a low-risk, dependable way to grow their savings, a CD may be a smart choice.

Choosing the Right CD Term for You
When it comes to choosing the right CD term, it is important to consider your financial goals and timeline. Generally, the longer the CD term, the higher the interest rate, but you'll also have less liquidity. If you anticipate needing the funds sooner, a shorter-term CD may be a better option. It's important to review the penalties for early withdrawal before making a decision. Additionally, consider laddering your CDs to have a mix of short and long-term savings for better flexibility. Laddering CDs means dividing your investment across multiple CDs with different terms and maturity dates. This strategy allows you to access some of your money periodically while still earning a higher interest rate than traditional savings accounts.

It is essential to align your choice of a CD with your overall financial goals and risk tolerance. Consulting an advisor may be beneficial for crafting a well-rounded strategy that incorporates CDs or other investment opportunities to meet your individual needs. Ultimately, by carefully assessing your financial situation and long-term objectives, it’s possible to make informed decisions about whether CDs are the right fit for you!
Check out Merchants Bank's CD calculator.

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