What Is a Certificate of Deposit?
A Certificate of Deposit (CD) is a time deposit account offered by banks and credit unions. You agree to deposit a sum of money and leave it untouched for a specific period (the "term"). In exchange, the bank guarantees a fixed interest rate for the entire term.
Terms typically range from 3 months to 5 years. Generally, the longer the term, the higher the rate, though this can fluctuate based on the current interest rate environment.
How CDs Work
| Feature | How It Works | | :--- | :--- | | Deposit | You put in a lump sum (often $500 minimum) | | Term | You choose the length (3 months to 5 years) | | Rate | The bank locks in a fixed interest rate | | Growth | Your money earns interest at that rate for the full term | | Maturity | At the end of the term, you get your money plus interest |
Example: You put $1,000 in a 12-month CD at 4.5% APY. After one year, you have $1,045. The rate was guaranteed — even if the bank's other rates dropped during the year.
Note: Deposits at FDIC-insured institutions are protected up to $250,000 per depositor, per insured bank, for each account ownership category [1], [7].
CDs vs. High-Yield Savings Accounts
| Feature | CD | High-Yield Savings | | :--- | :--- | :--- | | Interest rate | Fixed (guaranteed) | Variable (can change) | | Access to money | Restricted until maturity | Anytime | | Early withdrawal penalty | Yes (often 3-12 months of interest) | No | | Best for | Money you won't need soon | Money you might need |
When to Use a CD
Good Uses
- Saving for a known future expense: You're saving for a car purchase in 18 months and want a guaranteed return.
- Locking in a high rate: When interest rates are high and you expect them to fall, a CD locks in the high rate.
- Part of a CD ladder: Spread money across multiple CDs with different maturity dates for a mix of access and higher rates.
When to Avoid CDs
- Your emergency fund: Emergencies don't wait for CD maturity. Keep your emergency fund in a high-yield savings account.
- You might need the money early: Early withdrawal penalties can eat your interest.
- Rates are rising: If market rates are trending upward, a variable savings rate may eventually out-earn a locked CD rate.
What Is a CD Ladder?
A CD ladder splits your money across multiple CDs with different maturity dates. This gives you both higher rates and periodic access to your funds.
| CD | Term | Matures | | :--- | :--- | :--- | | $2,000 | 1 year | Year 1 | | $2,000 | 2 years | Year 2 | | $2,000 | 3 years | Year 3 | | $2,000 | 4 years | Year 4 | | $2,000 | 5 years | Year 5 |
Each year, one CD matures. You can use the money or roll it into a new 5-year CD. You always have access to some funds while earning higher rates on the longer-term CDs. If you're ready to start planning, use our Compound Interest Calculator to see how your savings could grow over time.
