A Certificate of Deposit, better known as a CD, is essentially a type of Savings Account that garners higher interest over a set time frame. You establish a fixed interest rate, usually determined by your deposit amount, and a fixed amount of time you will leave your funds with the bank. They typically do not incur any monthly fees. A CD is a great low risk, small reward investment.
Term length may be as short as a few weeks up to 10 years. However, the usual length is 3 months, 1 year, or 5 years. The higher the initial investment and term length will equate to a higher interest rate.
The differences between a CD an a savings account are mainly the following.
Savings Accounts you can withdraw money pretty freely, but CDs can only be withdrawn by breaching your contract and incurring a penalty cost.
Fixed time frame for the CD whereas you can close your Savings Account and withdraw your money whenever you chose.
CDs will pay off for those of us who are certain that they won’t need access to that cash during the duration of the term length. A five year CD with a 3.25% APY, about the highest rate you’ll find, will earn over $880 on a $5,000 deposit. Keep the same amount in a savings account that earns a top-notch rate of 1.90%, and you’d earn about $500 after five years. Over that five year period, the CD earned nearly double what the Savings Account did.