What is a Certificate of Deposit?

By: TXRB Staff | 20 Jun 2023

Certificate of Deposit

If you want your savings to grow and earn more interest than a savings account, consider a CD or Certificate of Deposit. CDs offer fixed interest rates for a specific term, helping you make more interest on the money you’re saving. They can be a great way to diversify your investment portfolio.

Definition of a CD

A Certificate of Deposit is a timed deposit. You choose the term for which you can lock the money up and earn interest for the entire period. It’s best to leave the funds in the CD until it matures, but some allow early withdrawals for a small fee.

CDs can help you reach your financial goals faster because they pay higher interest rates than savings accounts, and it’s harder to access the funds.

How do CDs Work?

It’s easy to open and use a CD. Here’s how.

  • Choose the term you can lock up the funds; terms are usually available between 3 months and three years
  • Apply for the account 
  • Transfer funds either electronically or in-person deposit
  • Leave the funds and let the interest compound
  • Receive your original funds plus interest earned at the end of the term

CDs vs. Savings Accounts

So how do CDs compare to savings accounts?

There are a few key differences to understand:

  • You can make deposits and withdrawals on savings accounts without penalty (up to six withdrawals a month)
  • Savings accounts earn lower interest rates because of the flexibility
  • Savings account interest rates can change over time

Who Should Choose a CD?

Before choosing a CD, consider these factors:

  • Can you tie up your funds? You may be unable to access your funds for the CD’s term. Don’t deposit the funds you’ll need shortly, or it could cost you a penalty.
  • Do you want a higher interest rate? CDs can help you get them by paying higher interest rates if you’re trying to reach a specific financial goal.
  • Are you looking for an investment with low risk? CDs have little to no risk, especially when placing funds with an FDIC-insured bank.

Who Should Choose a Savings Account?

You should choose a savings account instead of a CD in the following situations:

  • You need the funds in the near future
  • The money is a part of your emergency fund
  • You don’t have at least $1,000 to invest yet

Final Thoughts

Certificates of Deposit are a great way to earn interest fast while reaching your financial goals. Once you’ve saved an emergency fund and have ‘extra money’ to invest, consider a CD for safe investing.

There’s little to no risk, and the interest rates are comparable to what you might earn on some investments but without the risk. Diversifying your capital across savings, CDs, and investments can help you make your money grow the fastest and help you reach your money goals.

If you’d like to learn more about CDs and how they can help you, check out the options at Texas Republic Bank today!

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