What Is a Certificate of Deposit?
Certificates of deposits are interest-bearing savings accounts offered by banks and credit unions that provide CD holders with a fixed interest rate. There are many kinds of CDs, ranging from high yielding to jumbo CDs.
Investors enjoy CDs because of their predictable interest rates and terms. Fixed-income investors use CDs as part of their passive income strategy, and retail investors use CDs to earn interest on their savings.
Many savers utilize CDs over high-yield savings accounts because they have historically earned higher interest rates. Savers store slush funds or surplus cash while saving for a new car, a down payment on a home, or other large-ticket purchases.
CDs allow you to lock in a known interest rate and term. Plus, your deposits are insured by the FDIC.[1] Check out Smart Money’s certificate of deposit calculator to see what structures might make sense for your finances.
Certificate of Deposit Calculator
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Certificate of Deposit
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Member NCUA
Alliant Credit Union CD
Smart Money Rating: 5/5
APY: 5.10 % (Terms Apply)
Required Minimum Balance: $1,000
Member NCUA
Consumer Credit Union CD
Smart Money Rating: 5/5
APY: 5.00% on 13 month Certificate (Terms Apply)
Required Minimum: $250
Member FDIC
Quontic 6 Month CD
Smart Money Rating: 5/5
APY: 5.10%
Required Minimum Balance: $500
How to Select a CD
Choosing the best CD is a matter of determining what is best for your financial situation.
- Deposit Amount: Depending on how much excess cash you have, you can select CDs on a sliding scale of deposit thresholds. You can utilize your deposits to create a CD ladder to earn interest income continuously.
- High-Interest Accounts: Optimizing for high-interest rate accounts is a strategy many investors adopt. Not all CDs are created equal, and you should research banks and credit unions with the highest interest rates to maximize your savings and interest growth. (Read about the Best Certificate of Deposit Accounts).
- Factor in Term Length: The time you select to invest in a CD can significantly affect your financial portfolio and returns. Based on your financial planning and portfolio allocation, you could stagger investments in 3-month, 18-month, or 60-month CDs.
- Ease of Access: Online certificates of deposits have the advantage of being very easy to manage. You can link these CDS into your investments view in many robo-advisor accounts to monitor your progress and total net worth. Some banks and credit unions still use simple CD accounts.
- Overall Financial Plan: You can always work with a financial planner to determine how much of your excess cash you should invest in certificates of deposit. Adopting a CD investment strategy to lock in known interest rates might boost your portfolio if you are overexposed to stocks, bonds, or real estate.
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Glossary of CD Terms
Here are several key CD terms to know:
- Deposit: This is the initial cash deposit you make to purchase the certificate of deposit. Unlike a high-yield savings account, you don’t add sporadically to your balance over time. Instead, you adopt a set-it-and-forget-it approach to your initial deposit.
- APY: Annual Percentage Yield is the percentage your bank or credit union pays you for your funds. APY uses compounding interest on both your account balance plus interest. With a CD, your interest rate is fixed and locked in for the term, or length, of the CD.
- Term Length: The term is the length of time your CD lasts. Many financial institutions offer terms ranging from 6 months to 60 months or more. Some banks list a CD's term in months, and others in years. Your accumulated earned interest is paid at the end of your CD term.
- Compounding Frequency: Banks and credit unions offer CDs with daily, monthly, quarterly, and annually compounding frequencies. For illustrative purposes, we used monthly and annual compounding.
5 Times You Might Want a CD
1. Slush Fund: Financial experts argue that you should save and slush fund of three to six months of living expenses (over and above your emergency fund). Slush funds help blunt periods of unexpected unemployment, provide a savings cushion, and help reduce your financial stress. Storing your slush funds in short-term CDs can be an effective investing strategy.
2. New Car Purchase: Whether buying a new car for the first time or upgrading to a newer model, saving for a down payment, or paying for a car with cash requires significant savings. You can safeguard these savings in a CD until you are ready to purchase.
3. Home Down Payment: Savings for a down payment for a house is the largest barrier to entry into the housing market. New homebuyers often spend years saving for their dream home. Storing your savings in a CD can be an effective strategy for growing your funds over time, allowing them to grow at a known rate until you are ready to purchase your home.
4. Received Inheritance: Unexpected cash windfalls, like an inheritance from a family member or friend, offer an opportunity to increase your net worth. Resisting the urge to spend these funds can be accomplished by locking these funds up in a CD while earning interest income.
5. Bonus Payments: Annual bonus payments or commission checks can provide a tremendous financial boost to your net worth. Investing these funds into interest-bearing accounts like a CD can grow these funds even more. For those inclined toward excessive spending, this strategy can mitigate your spending tendencies.
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Frequently Asked Questions
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per institution. Insurance protects your money from loss if the bank or credit union fails.
CD rates have declined in 2024 due to the Federal Reserve’s decision to decrease the federal funds rate. Economists are mixed on whether cuts will continue into 2025.
Financial experts advocate for investing in CDs because they are safe and secure investments. Looking for high-interest-rate CDs can help you lock in above-average market returns. However, it is always important to factor in interest rate risk and inflation.
(1) Federal Deposit Insurance Corporation. Deposit Insurance. Last Accessed January 12, 2025.
