A CD Can Help You Build Your Savings Account

Not all CDs play music or the latest films. One CD helps you save money.

The money-saving CD is a “certificate of deposit.” It helps you build your bank account because it often earns more interest on your savings than you would in a regular savings account. This helps your savings to grow faster. A CD keeps your money in a safe bank account for an agreed upon length of time. The last date of that period is called the “maturity” date.

You can buy a CD that will mature in a short time, such as one, three, or six months, or after a longer term, like one year, five years, and so on.

Here’s how they work: Say you have $1,000 in savings at your bank, which is earning only 1.5% interest. The bank is offering an 18-month CD earning 4.5% interest at maturity. If you buy the $1,000, 18-month CD, the bank will give you back your $1,000 when the CD matures in 18 months, plus the interest earned. But you must not touch the $1,000 until the day it matures. To get the best interest rates, you have to lock up your money for longer periods.

Don’t use the money before it matures

CDs can be a good investment if you do not expect to use the money before the CD matures. You will lose interest and pay a penalty if you cash in a CD before it matures. The penalty can be as much as 10% of the CD face amount.

The best place to buy a CD is through a national bank, savings and loan, or credit union. Make certain your CD is insured by the federal government.

Source: Federal Reserve Bank