What is a CD and how does it work?

A Certificate of Deposit (CD) is a savings account with a fixed interest rate and fixed term (3 months to 5+ years). You deposit money and can't withdraw without penalty until maturity. In exchange for this commitment, CDs pay higher rates than savings accounts. They're FDIC insured up to $250,000, making them safe, predictable investments.

What happens if I withdraw from a CD early?

Early withdrawal penalties typically forfeit 3-12 months of interest, varying by bank and CD term. Some banks charge different penalties based on remaining term. If you withdraw before earning enough interest to cover the penalty, you'll lose principal. Only invest money you won't need until maturity. Consider CD laddering for flexibility.

What's a CD ladder and why use one?

CD laddering means buying multiple CDs with staggered maturity dates. For example, buy 1-year, 2-year, 3-year, 4-year, and 5-year CDs. Each year, one matures, providing access to cash while maintaining higher rates on longer terms. This strategy balances higher yields with liquidity and protects against rate changes.

Are CD rates better than savings account rates?

Yes, CDs typically pay 0.5-2% more than savings accounts because you commit to leaving money untouched. However, high-yield savings accounts offer flexibility without penalties. Compare rates: if CD rates are only marginally higher and you might need the money, choose savings. For money you definitely won't need, CDs maximize returns safely.

When are CD rates highest?

CD rates follow federal interest rates. When the Federal Reserve raises rates to combat inflation, CD rates increase. Shop around—online banks and credit unions often offer higher rates than traditional banks. Rates vary significantly by term: sometimes short-term CDs pay more than long-term (inverted yield curve), creating opportunities for savvy savers.