What is a Certificate of Deposit?

If you hear someone say CD, they may not be talking about music. They may be talking about a Certificate of Deposit, which is a short-term investment tool. If you are looking for ways to not only save but also to increase your money, and you’re not up for playing the market, a CD might be a good option for you.

A Certificate of Deposit is just what it sounds like. You make a deposit, and you hold a certificate that explains how much money you deposited, the interest rate you will be paid for allowing the bank to use your money, and the length of time you agree to leave that money untouched.

The timeframe may be one year or less but may be at least five years, depending on what you are comfortable agreeing to. The interest rate depends on the length of the CD and the amount of money you deposit, but it is often nearly three times that which is earned on a regular savings account. Of course, a CD is not as liquid as a savings account, and you may be required to pay heavy penalties if you withdraw money before the CD has had a chance to mature.

Certificates of Deposit are low risk. They are insured by the FDIC, and you will generally only lose the interest you have accumulated if you withdraw early.

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