Is a Certificate of Deposit right for you?

A Certificate of Deposit, a.k.a a CD, is a great option to grow your savings, but there are some factors you should consider before opening one up. There are various types of CDs out there, but for this blog post, we will focus on a Traditional CD.

First, what is a CD, anyway?

When you invest in a Certificate of Deposit, you deposit your funds in the account for a fixed time period (term), which could be months or years, and you will earn a specific rate of interest over that time period. This interest rate is usually higher than a rate you earn on a regular savings account, and the interest you earn in the end can be determined by how often the interest is compounded, whether daily, annually or any time in between.

Compound interest is powerful because it allows you to earn interest on interest you’ve already earned. Say you invest $5,000 in a CD for a 36-month term and it compounds interest daily. The first day, you will earn interest on that $5,000, and the second day, you will earn interest on the $5,000 plus the interest you earned from the day before. As the term goes on, you will earn interest each day on the initial $5,000 plus on the interest you continue to earn.

The more often the interest on your CD is compounded, the more you will earn. And, of course, the longer you keep your money invested with a financial institution, the higher the interest rate typically will be.

Can you go long without your money?

Most CDs do not allow you to withdraw the funds you deposit or any interest earned before the term is over, without paying a penalty. When the term of the CD has ended, and you’ve earned all the interest you can earn, this is known as maturity. Before you open a CD, you should first make sure that you are actually able to have those funds inaccessible to you over the entire term you sign up for.

Some CDs come with a bump up option. For example, say you open a 36-month CD and 10 months into the term the financial institution offers a higher rate on the same CD option, you can request to earn that higher interest rate. Jeanne D’Arc Credit Union’s 24-month and 42-month CDs are examples of this.

Typically, this is the only change you are allowed to make when it comes to your Traditional Certificate of Deposit, and it is only available on CDs that offer a bump-up option.

I bet you’ll like the low-risk factor…

A CD is considered to be one of the safest and lowest-risk investment vehicles. When you deposit your money into a CD at a credit union or bank, your funds are insured at least up to $250,000. Credit unions are backed by the NCUA (National Credit Union Administration) and banks are insured by the FDIC (Federal Deposit Insurance Corp). Look for the NCUA or FDIC statement or label within your institution’s branch offices, on their website or other digital means of communication it uses. Some institutions also have secondary insurance that covers any loss over the $250,000 limit.

Other opportunities

Some financial institutions will offer a promotional CD term and rate. Oftentimes, these promos offer a higher interest rate, but are only available for a limited time. If you’re thinking about investing in a CD, keep an eye out for these types of promotions as they can help to build your savings more quickly if you don’t need to access them for the specified term.

Let’s look at an example

You have $10,000 you’re thinking about depositing into a CD. You have your eye on a 48-month CD that earns a 2.00% interest rate, compounded and credited monthly. You don’t foresee you needing the $10,000 within the next four years, so you put the funds in the CD.

At the end of the 48-month term, your $10,000 will turn into $10,832.15. You will have earned $832.15 in 48 months, and you only had to lift a finger while opening the account.

Use this helpful calculator to determine how much YOUR savings will be worth.

The bottom line

Extra money can be hard to come by these days, but maybe you’ve just received a cash prize, a bonus from work or an inheritance. Maybe you’ve just been such a great saver over the years, that you have more than enough cushion in your savings account. If you have a certain amount of money that is just hanging out in your account not earning as much as it could be, and you can get away with putting it away for an extended period of time, a CD could be a good option for you!

Ready to get started? Check out Jeanne D’Arc Credit Union’s options for Certificates of Deposit. They are offered in various monthly terms and can be opened right online.

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