Consider a CD for Long Term Savings

Want your savings to earn more than they would in a traditional savings account, without taking on risk? Then you may want to look into a certificate of deposit, more commonly known as a CD. If you do your banking at a credit union, you may know them as share certificates. But to keep things simple, we’ll just call them CDs. With a CD, you’re saving a sum of money for a certain amount of time – typically three months to five years – at a fixed interest rate. Typically, the longer the term, the higher the interest rate your financial institution will offer. You can withdraw the money when your CD matures or roll it into a new CD. It’s a good way to save for longer-term goals – like maybe buying a car or putting a down payment on a house – if you don’t need immediate access to that money.

What Are the Benefits of a CD?

As previously mentioned, CDs have fixed interest rates, which means your rate is locked in for the entire term, even if the market goes haywire. Those interest rates are higher than you’ll find with other types of accounts, like traditional savings or money market accounts. Additional benefits include:

1. The ability to estimate your total earned interest. With a CD, you know the rate and the term upfront, so you can easily calculate how much you’ll earn.
2. Security for your savings. CDs purchased through a federally insured financial institution are insured up to $250,000 per depositor.
3. Knowledge of when you can withdraw what you’ve saved. You’ll know when your CD is set to mature, which is the date you can withdraw your deposit plus earned interest. 

Remember, a CD probably isn’t the right choice if you need immediate access to your cash. In most cases, you will pay a fee if you withdraw funds before your CD matures.

 What Is CD Laddering?

With CD laddering, you divide up your savings and buy separate CDs with different maturity dates. Instead of waiting, say, five years for one CD to mature, you would have a CD maturing every few months or every year. When one CD matures, you can decide if you want to buy another CD at the same or longer term, use the money for something else, or both. CD laddering allows you to earn more money in interest than you would with a savings account and still have access to some of your money every so often.

 How to Open a CD

Feeling ready to open a CD? No matter how much you plan to save, the process is simple. Just follow these steps:

1. Select the type of CD that makes sense for you. Consider your savings goals, how much you want to deposit, and how much risk you are willing to take. 
2. Decide on the term. Typically, the longer the term, the higher the interest rate a CD will pay.
3. Consider how you want interest to be paid. Interest may be paid monthly or annually, and you may have the opportunity to reinvest it.
4. Think about how you will deposit. You could mail a check, transfer funds online, or even make a phone transfer.
5. Read the disclosure statement. The disclosure statement contains important information about your interest rate, whether it is fixed or variable, and exactly when and how the financial institution will pay interest to you. It also includes the CD’s maturity date and any penalties that apply for early withdrawals.
6. Open your account. Once you’ve chosen your financial institution and CD, you can open your account. In addition to a deposit, you’ll likely need to provide your name, address, contact information, and Social Security number.

 Have Questions About CDs?

There are plenty of things to consider when deciding if opening a CD is the right choice for you. If you have questions about the types of CDs available, which one is right for you, and if you could benefit from CD laddering, talk to someone at your trusted financial institution.