In the financial world, a CD refers to a certificate of deposit. Some might say that a CD isn’t an investment because they are insured by the FDIC (a US owned corporation which protects certain banking products), but I’m counting them here because they do provide a higher return than savings, but at a significant cost: time.
So What is a CD?
A certificate of deposit functions in many ways like a savings account. You open the the account and deposit a certain amount of money. Interest is earned on this deposit. Pretty much every bank in existence issues CDs. However, you do not just withdraw money every time Nintendo releases a new Wii game.
What’s So Great About a CD?
Mainly, the benefit is a higher interest rate. A secondary benefit, if you want to call it that, is it forces some self control. You can’t just take the money out whenever you feel like it or you’ll lose money.
What’s Not So Great about a CD?
In exchange for a higher interest rate, the bank locks up your money for a set amount of time. If you withdraw your money before this time period is up, you will pay a penalty. Banks can also set up a “withdraw window” where if you don’t collect your money before this period is up, the money will be rolled over into a new CD. If this happens, your money is once again tied up for a certain period of time.
Overall
If you have a lot of cash and know you might only need a portion of it, putting the rest in a CD, or across multiple CDs, can be a good way to get a better return than what a regular savings account would provide. On the other hand, you need to choose the length of CD carefully. The shortest are typically 3 months. If you have good reason to believe you’ll need the money before that, then look elsewhere to keep your money.
