Certificate of deposit

A certificate of deposit trades access for certainty. You hand the bank a sum for a term you choose, the bank pays a rate it cannot change until the term ends, and on the maturity date you get the sum and the interest back; take the money out sooner and the bank keeps a penalty, usually a set number of months of interest. The rate is locked for the whole term, which is the point: a savings account's rate can be cut next month, and a CD's cannot. A $10,000 CD at 4.25% APY for twelve months pays $425 whatever savings rates do in between, and the deposit is insured like any other, so the risk is not losing the money but needing it before the date.

In a sentence

• "Next August's tuition is in a twelve-month certificate of deposit at 4.25% APY, so the $10,000 earns $425 and cannot be touched until then."
• "A certificate of deposit pays a rate the bank cannot lower; a savings account pays a rate it can."
• "Breaking the certificate of deposit four months early would have cost three months of interest, about $106."

How it works

1. Choose a term and deposit a sum. Terms run from a few months to five years, and many CDs have a minimum deposit. The rate is fixed at opening and quoted as an APY.
2. Leave the money in for the term. A standard CD takes no additions after the opening deposit; interest compounds on the bank's schedule and is credited to the certificate.
3. Withdraw early and pay the penalty. The penalty is usually a set number of months of interest, larger for longer terms, and on a very early withdrawal it can exceed the interest earned and come out of the deposit.
4. At maturity, decide within the grace period, commonly a week or so, whether to withdraw, add or change the term. Do nothing and most banks renew the CD for the same term at that day's rate.

Interest at maturity = deposit × ((1 + APY)^years − 1)

For a one-year term that is the deposit times the APY.

An example

The example assumes a $10,000 deposit, a twelve-month CD at 4.25% APY with a penalty of three months of interest, and a high-yield savings account at 4.00% APY whose rate is cut to 3.50% after six months; all three are the example's inputs.

Held to the date, the CD earns $50 more than the savings account, because the savings rate fell and the CD's did not. Broken four months early, it earns $200 less, because the penalty took most of the last months' interest. The CD wins only for money that stays the whole term, which is why the term is chosen from the date the money is needed rather than from the rate.

Why it matters

A CD is the right container for money with a date and the wrong one for money without. Tuition due in August or a purchase eighteen months out has a date the term can be matched to, and the locked rate means the plan does not depend on where savings rates go in between. The emergency fund has no date, and a CD holding it turns the next emergency into an early withdrawal with a penalty; a savings account is its place. The other mistake is the renewal: a CD that rolls over automatically locks the money up for another term at a rate you would not have chosen, which is why the maturity date belongs on the calendar.

Certificate of deposit versus high-yield savings account

A CD fixes the rate and the date; a high-yield savings account leaves both open. The savings account can be drawn on tomorrow, takes deposits at any time, and pays a rate the bank changes as it likes. The CD pays the rate set at opening for the whole term, takes no additions, and charges a penalty for leaving early; in return the rate is certain, and often a little higher on the day it is opened. When rates are expected to fall, the CD locks in today's; when they are expected to rise, the savings account follows them up. See High-yield savings account.

Common questions

Is a certificate of deposit safe? Yes, to the insured limit. A CD at an FDIC-insured bank or an NCUA-insured credit union is a deposit covered up to $250,000 per depositor, per institution, per ownership category. The rate cannot change and the balance cannot fall; the only cost is the penalty for withdrawing early.

What is a good CD rate? One that beats the high-yield savings accounts available the same day, for a term you can leave the money in. Rates move with the Federal Reserve's short-term rate, and longer terms do not always pay more than shorter ones, so compare terms and banks on the same day rather than against any number you remember.

What is a CD ladder? Several CDs with staggered maturity dates instead of one. Split $10,000 into five $2,000 CDs maturing in one, two, three, four and five years, and as each matures renew it for five years; after four years a CD matures every year at the five-year rate, and a fifth of the money is always within a year of being available.

Should the emergency fund be in a CD? Not the whole fund, because an emergency does not wait for a maturity date. Some households keep the first month or two of essentials in savings and put the rest in a no-penalty CD or a short ladder, reachable within days at a slightly lower rate.

Go deeper

• The Savings goal calculator works out what to set aside each month to reach a goal by a date, with the account's interest counted along the way.
• How to save for a big purchase inside your budget turns a price into a monthly share in a category that carries its balance.
• How to save for a down payment while renting sizes the target and keeps the money in cash or a certificate that matures before the date.

Where it shows up in Zypper

Zypper connects a CD alongside your other accounts. Checking and savings accounts, including money market accounts and CDs, connect through your bank, and the certificate's balance counts toward net worth, charted over time, with connected accounts updating every day. See Supported account types and Net worth tracking for the details, or get started with Zypper to see every balance in one place.