Certificates of Deposit (CD’s) are one of the safest investment vehicles out there. If you want to be at the low end of the risk/reward spectrum, CD’s might be the right choice.
CD’s pay you interest on your money very much like a savings account, but your earnings are typically higher with a CD. Go ahead and compare for yourself: you should find that CD’s pay a higher APY than a savings account.
Why Do CD’s Pay More Than Savings?
When you buy a CD, your bank is doing you a favor by paying you higher interest. Why would they do you any favors? They expect that you will return the favor by keeping your money in the CD for a specified period of time. This gives them some certainty and ability to use your money for other purposes (such as lending it to other customers or investing it).
How do CD’s Work?
Getting a CD is easy. Simply tell your bank or credit union that you’d like to buy a CD. They’ll most likely have a simple form with some disclosures. Then, they move the money into the CD for you. You don’t need an actual certificate – usually you’ll just see a distinct category for the deposit on your statements.
CD’s pay interest at some point. You can choose to reinvest that interest, or spend it. I suggest reinvesting if you’re really trying to make the money grow. Once you start earning interest on your interest (compounding) your account grows faster.
When your CD matures you usually have a window (10-15 days in many cases) of time to decide what to do next. Usually, your bank will automatically reinvest into a new CD if you don’t give them alternate instructions. Make sure you know the policy, and that you give proper instructions if you don’t want the money rolled into a new CD.