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A certificate of deposit (CD ) ACCOUNT
Tip: Before opening a CD, make sure you have an emergency fund—a comfortable amount of savings in an easily accessible account, such as a savings account.
A certificate of deposit (CD) is a low-risk savings tool that can boost the amount you earn in interest while keeping your money invested in a relatively safe way. Like savings accounts, CDs are considered low risk because they are FDIC-insured up to $250,000. However, CDs generally allow your savings to grow at a faster rate than they would in a savings account.
CDs come in varying terms and may require different minimum balances. The rate you earn typically varies by the term and how much money is in the account. In general, banks offer a variety of terms and rates. It is important for you to review these rates and terms with each new CD and renewal to pick the product that best fits your current needs.
Like savings accounts, CDs earn compound interest—meaning that periodically, the interest you earn is added to your principal. Then that new total amount earns interest of its own, and so on. Because of the compound interest, it is important to understand the difference between interest rate and annual percentage yield (APY). The interest rate represents the fixed interest rate you receive, while APY refers to the amount you earn in one year, taking compound interest into account.
There are a number of factors to consider when choosing a CD. First, when do you need the money? If you need it soon, consider a CD with a shorter term or a CD that offers penalty-free options. But if you’re saving for something five years down the line, a CD with a longer term and higher rate may be more beneficial. It’s important to look closely at the features of CDs you’re considering to find one that meets your needs. Also, consider the economic environment. If it seems that interest rates may rise, or if you want to open multiple CDs, CD laddering can be a good option.