Barbie, What’s a CD?

If you saw the Barbie movie last year you may remember a scene when the Ken’s were explaining a certificate of deposit (CD) to the Barbie’s. In the movie, the Barbie’s didn’t care at all and only wanted to overthrow the Kens. Long story short I hope you read today’s newsletter about CDs with an open mind excited to know more about this great savings tool. Enjoy!

What is a Certificate of Deposit (CD)?

No, it’s not an early 2000s silver disc filled with your favorite 13 songs you burned from your computer. A certificate of deposit is a financial account offered by banks to grow your money. CDs pay interest on deposited money at a rate higher than other savings accounts. You receive a premium return on this money because in return, you promise the bank not to touch the initial deposit until the end of the term. Most CD terms are a couple months to a couple of years in length. This means if you deposit $1000 in a CD today, you aren’t allowed to add or take from that $1000 until the end of the CD term.

It’s similar to any other account types, but there are some specific rules to CDs that differ from a traditional savings account.

Special Rules for CDs

The following are specific rules that apply to CDs making them a bit different than a standard savings account:

1. Timelines: When opening a CD, you are promising to keep a set amount of money in the account for a specific amount of time. CD terms last from a couple of months to a couple of years. Once the money is in the account you cannot withdrawal the money until the end of the agreed upon time.

2. Higher Interest Rates: The interest rates offered for CD accounts are typically higher than standard savings accounts. This is great because a higher interest rate means your money grows faster. CDs offer higher rates because they are essentially locking up your money for the entire term length, unlike savings accounts which allow you to deposit or withdrawal at any time.

3. Early Withdrawal Penalties: When you open a CD, you deposit a set amount of money. After opening you cannot deposit or withdrawal any amount until the end of the CD term (maturity date). If you do withdrawal money prior to the maturity date, you will incur penalties which usually result in forfeiting all the earned interest you gained on your initial deposit.

What Are Advantages to a CD?

CDs are a great financial tool because they are low risk while still earning interest. As long as you don’t touch your initial deposit, you are “guaranteed” a specific return on your investment. This return will be higher than other checking and savings accounts making CD’s an attractive place to hold money for a couple months or years. In comparison, a checking account today earns .05% interest, while a CD earns 5%. If you’re nervous about losing money in the stock market, consider investing your excess cash in a CD since it’s safe like a checking account while paying a significantly higher amount of interest. Free money!

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