Certificates of Deposit, commonly known as CDs, are similar to savings accounts in that they are a smart way to yield profit on your deposit through the accrual of interest. However, there are several distinct differences to the way financial institutions approach CDs as oppose to savings accounts. The main distinction is that while savings accounts have lower interest rates, the investor has continual access to the funds. With CDs, the investor enjoys a higher interest rate and greater profit yield but will not be able to withdraw any of the funds for a fixed amount of time.
When you open a checking account at a bank or credit union, you might be offered a savings account as well. You will earn compounded interest on the principle sum in the account, which basically means that the interest earned will be added to the principle for the calculation of the next month’s interest. You will also have ready access to these funds in necessary. However there are some downsides. For example, some banks require that customers keep a minimum balance in their savings account in order to avoid a monthly fee. If you are financial able to keep a minimum balance in a savings account, a CD might be better option for you.
CDs are essentially an agreement made the bank that the investor will deposit a fixed sum of money for a fixed amount of time. In return, the bank offers a higher interest rate. The catch is that the investor must agree to not withdraw any funds from the CD until it reaches maturity (the financial term for the expiration date). Should they withdraw money, they will be penalized. CDs can last anything from three months to six years, with longer-term CDs generally having more favorable interest rates. Like with a savings account, CDs offer compounded interest. However, CD investors can choose to receive interest payments as they accrue or have them added to the principle.
Deciding whether a savings account or a CD is the best choice for your money, speak to your bank about what kind of interest rates they can offer you. If it’s possible for you to invest a large sum of money without needing immediate access to it, a CD is probably the best bet. If not, a savings account might be a better option.
