How Does a Certificate of Deposit Work?

Certificates of deposit (CDs) are a type of savings program, offered by banks, which can pay substantially more than traditional savings accounts. When you purchase a certificate of deposit, you are, in a sense, loaning that money to the bank by agreeing to save a certain amount of money for a set amount of time. The amount you deposit and the length of time you leave it in the bank lets you earn a higher rate of return, and a CD offers the added security that comes with having your deposit FDIC-insured.

How Are CDs Different than Savings Accounts?

A certificate of deposit differs from a savings account in two crucial ways - 1.) availability of funds, and 2.) the length of time the deposit is invested - called a "term."

Availability of Funds. You can continue to add or withdraw money from your savings account. You earn interest on it, but the amount is considerably smaller than what you'll earn on a CD. Savings accounts are a good idea if you need continuous access to your funds, with the trade-off being that you won't get as high a rate of return.

Length of Time of the Investment. A certificate of deposit requires that you save your money for a set period of time. You agree not to withdraw or add to your initial deposit. The interest you earn from the bank will be compounded daily and it will be added to your balance at the end of each month. This all happens simply by doing what you should be doing anyway - saving your money.

Getting the Best CD Rates

The best CD rates come with longer term lengths and higher deposit amounts. If you can invest over $2000 for 5 years, you'll get a higher rate than if you invest only $1,000 for 6 months. That's not to say that CDs don't still earn you a better return if you have less to deposit or you can only deposit it for a shorter amount of time. Banks are willing to reward you for your loyalty and for saving with them, even if it's not for the maximum amount. And investing $1,000 for 6 months will give you a greater return than depositing the same amount for the same time in a traditional savings account.

A Certificate of Deposit Offers Many Benefits

Unlike stocks or mutual fund products that may be offered by a bank, a certificate of deposit, is backed by the FDIC, which means its security and safety are insured by the U.S. government. CDs aren't affected by the ups and downs of the stock market or money markets. This makes a certificate of deposit a great choice if you want to minimize risk while still making a guaranteed return on your investment.

You also benefit because the interest on your deposit is compounded daily and added to your balance every month, which increases your total return. You can also own and manage multiple CDs without needing regular "accounts" for them. Think of a certificate of deposit as a loyalty program from your bank that rewards you for your business. CDs are an easy way to meet any savings goal - large or small.

Jess Hall writes out of Jersey City about different investment opportunities, including how to get the certificate of deposit rates. Always looking for a trusted financial institution for advice and tips she tends to look up information at http://www.aurorabankfsb.com/ more often than not.

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.