When you first see the acronym, “CD”, what comes to mind? Your brain may jump to the old compact discs, a now antiquated music listening format that reminds you of younger days when almost everyone had a Walkman CD player. While compact discs might be a thing of the past, there’s another meaning to the acronym that isn’t going out of style anytime soon which is a certificate of deposit. If you have never used - or have even heard of - this kind of CD, believe us when we say that you are not alone. That is why we have developed this guide for you to better understand what they are and how to use them to your benefit.
After all, a CD can be a great way to grow a healthy amount of savings - you just need to know where to start.
First, what is a CD?
A certificate of deposit, sometimes referred to as a share certificate, is a type of low-risk savings account that is insured by either the federal government or the National Credit Union Administration. Certificates of deposit carry a much larger percentage of interest than a conventional savings account with some accruing up to a 3.2% annual percentage yield, compared to the less-than 1% APY rate found in a regular savings account.
This does come with one caveat: the money put into a CD is usually locked into place over an agreed upon period of time--once it is deposited it cannot be withdrawn until you have reached the end of that period.
Money put into a CD accrues more money based on the terms of the deposit period and the total amount of money deposited. In other words, a deposit of $5,000 with a 60 month term will make more on interest than a deposit with a 48 month term; both of these accrue more interest over the life of the terms than a $500 deposit would make over the same period of time.
How Do I Know It’s For Me?
CDs are particularly beneficial because of the high interest rates that they offer, and the safety of the investment. They offer similar safeties as a traditional savings account, but with a much higher net profit - which helps your wallet in the long run. On the other hand, when deciding whether to put your money into a CD account, there are a few things that one should consider:
CDs are beneficial as a source of supplemental income.
That is, if you have some extra money that you’re comfortable parting ways with for awhile then it makes a lot of sense to take advantage of the benefits of a CD provides. It is not an ideal substitution for something like an emergency fund, or a more conventional savings account. You want to already have established financial flexibility before investing in something that is more inflexible.
CDs generally have a fairly hefty penalty for early withdraw.
So, when considering a CD account, give some serious thought to both the amount you’re looking to deposit and the amount of time that you’re willing to be without access to those funds.
CDs will not grow your finances in a huge, drastic way.
When compared to something like the stock market, it doesn’t have the volatility seen in public markets. CDs can help you grow your finances in a steady and safe way. Although, you won’t see your investment make huge jumps, you also won’t see it completely tank either.
It’s predictable, low cost, and has guaranteed, expected returns. If you’re looking to invest, but are worried about more risky endeavors, CDs are a great vehicle for that.
Where Do I Start?
HRCCU has a number of different options if you are interested in investing in certificates of deposit (or special certificates). We work with a philosophy of broad accessibility, and so we offer a range of options across the board. Whether you want to invest $500-$150,000 for two-four years, or maybe you just have a few questions - we have services, rates, and terms that will help get your money where you want it to be. Don’t hesitate to contact us or visit a branch today to get the answers you need.
If you don’t think a CD account is for you, but still want to start saving, we’d recommend reading our blog on saving when you haven’t saved anything.
Thanks for reading!