Takeaways
- CDs offer a fantastic way to store cash and earn income on your savings.
- Research different types of CDs to see which one fits your financial needs.
- High-yielding CDs can offer your savings a jolt of interest income.
- CDs provide investors with the ability to keep funds safe and highly liquid.
- The FDIC insures deposits at many banks and credit unions, adding security to your funds.
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What is a Certificate of Deposit?
Before we dive into the different kinds of certificates of deposits (CDs), you might be wondering what a CD is or how a CD works. A CD is a savings account offered by banks and credit unions that requires you to set aside a certain amount of capital until maturity. CDs vary by their minimum balances, range of term length, and interest rates. During your CD’s term length, you can earn a variable or fixed interest rate depending on the CD.
Certificates of deposits are essentially a loan from you to the bank. In exchange for the bank using your funds, you are compensated for deferring the use of your excess cash funds.
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Quontic 6 Month CD
Smart Money Rating: 5/5
APY: 5.10%
Required Minimum Balance: $500
7 Types of CDs
Certificates of deposits are shorter-term investments that can suit your individual investment needs. Whether saving for a down payment for a house, purchasing a new car, or saving for a remodel, CDs let you earn interest on your savings. Think of a CD as your chunk of cash, which needs to grow until you meet your savings goal. Here are seven types of CDs to choose from:
1. High-Yield CDs
Online banks tend to offer high-yield CDs to attract new customers. These higher-yielding CDs are attractive to investors searching for yield on their savings. These online banks sometimes offer multiples above the national CD average yield. Luckily, these CDs act like normal CDs, with varying terms and interest rates. Conduct due diligence to ensure these funds are federally insured by the FDIC.
Smart Tip:
Start saving smarter by stashing your savings in a high-yield savings account. These low-risk savings accounts can add the juice you need to boost your savings.
2. Standard CD
Many banks and credit unions offer standard CDs. These certificates of deposits come with several core features, including a minimum deposit, fixed interest rate, fixed term, penalty with early withdrawal, and are FDIC insured. All other types of CDs are essentially a derivative of the standard CD. If you are looking for the tried-and-true path, a standard CD could be perfect for your money goals.
Smart Tip:
The FDIC insures deposits up to $250,000 per institution. Insurance protects your money from loss if the bank or credit union fails.
3. Jumbo CDs
Do you have $100,000 lying around? If you do, jumbo certificates of deposit could be a great place to park your cash. Jumbo CDs require minimum deposits ranging from $50,000 to $100,000. The benefit of investing in a jumbo loan is it they offer higher interest rates than standard CDs.
4. IRA CD
According to finance professionals, your retirement portfolio should have a percentage allocated to cash, cash equivalents, and short-term investments. If you have a Traditional IRA or Roth IRA, you can invest your funds in an IRA CD and earn interest on your retirement funds.
Balancing your potential investment returns with an IRA CD and stocks should be a prime consideration. Investing in an IRA CD is lower risk, but stock market returns are generally higher.
Learn More -> Retirement 101: How to Start Saving for Retirement
5. No Penalty CDs
Investing in a CD with no penalties sounds like a great idea. What’s the catch? No-penalty CDs are a lot like other CDs, with two paramount distinctions. First, no-penalty CDs tend to earn lower interest rates than high-yield CDs. Second, when you withdraw your funds early, you must take your fund deposit (no partial withdrawals).
No-penalty CDs are like high-yield savings accounts, but a crucial difference is that with a CD your interest rate does not change over time. The interest rate with a savings account can fluctuate from month to month.
Member FDIC
Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
6. Rate Bump CD
A rate bump CD (also called raise your rate) is an account that’s rate can increase over the term. The discretion to raise the rate is up to the bank or credit union. This allows you to capture additional interest in a high-interest-rate environment.
7. Brokered CD
Using your online brokerage account to purchase certificates of deposit can be a great idea, especially if you are consolidating investments into one portal. Instead of buying directly from a bank or credit union, you can buy and sell CDs through your online account. This gives you the ability to sell your CD early on a secondary market. Brokered CDs also come with tons of research and trading information to help you get educated on buying CDs.
Are CD Rates Increasing?
Banks and credit unions have increased their rates over the past several years due to rising interest rates. This allows you to capture returns on your savings without the risk of investing in stocks or other investments. (Read more about how the Federal Funds Rate affects interest rates on savings.)
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Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
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Smart Summary
Exploring the different types of certificates of deposits is an essential part of conducting your research. Make sure that you align the CD you choose with your short- and long-term savings goals and choose the right level of commitment for you. Not all CDs are created equal, so take the time to analyze what works for your money situation. Certificates of deposits provide great opportunities to earn interest on your hard-earned savings. In the end, growing your money is a smart money move.
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