Say you’re setting aside money every month and looking at options for earning interest on those savings. A typical savings account might be the most obvious option, but certificates of deposit, or CDs, are a type of savings account you may not be familiar with. However, CDs are considered to be one of the safest options for saving money and are likely to have higher interest rates than your regular savings account. In short, they’re worth considering.
The U.S. Securities and Exchange Commission (SEC) defines a CD as a saving account that holds a fixed amount of money for a fixed period of time. This time period can range from six months to five years or more. When you redeem your CD, you will receive your initial investment plus any interest earned during the fixed period.
One benefit of CDs is that there are multiple types available that can be tailored depending on your financial goals and needs. Some even roll into a new account when they mature, allowing you to continue earning interest without revisiting your credit union. The main risk of a CD is that inflation will grow faster than your money, which will lower your real returns over time.
Before you purchase your CD, make sure you read all the fine print on the disclosure statement. Your disclosure statement should provide explicit information about your CD, including:
- The interest rate, and whether it is fixed or variable
- When the credit union pays interest (e.g., monthly or semi-annually)
- Whether the interest payment will be made by check or electronic transfer
- The maturity date
- Penalties for early withdrawal
As with any other financial decision, gather as much information as possible before you make a decision.