Interest rates on regular savings accounts are not usually high enough to make them a good investment option for higher balances. A certificate of deposit, often called a CD in banking, is what many people use to earn more from their savings. You may find what certificates of deposits at banks are called share certificates at credit unions. CD accounts offer a great way to make the money you worked for begin to work for you. Keep the following information in mind when comparing and ultimately choosing the best CD for you.

What is a CD and Why Do I Want One?

A CD is a special kind of savings account. Like a savings account, it is insured by the FDIC, but limited access to your funds means CDs typically pay more interest than regular savings accounts. CD accounts usually have a minimum required deposit to open, and the funds are unavailable during the fixed term ranging from a few months to five years. There is a penalty for withdrawing your funds before the end of the term. But remember, the benefit of tying up your funds for the term of the CD is that you will be earning a higher, fixed interest rate. No matter if interest rates drop during the term, your interest rate will stay the same as when you opened the account.

You generally have three questions to answer when you open a CD:

1. How much can you place in the account?
2. What is the length of the CD term you feel comfortable with?
3. Will you roll over the money when the term concludes?
   

Comparing CDs and Options to Make Decisions

The money that you put into a CD should be funds that you can live without, as it will be tied up while it is in the CD account. This doesn’t mean that you absolutely cannot access your money, but you will lose some or all the interest you accrued if you withdraw it early, so it is best to allow the CD to mature to get the account’s full benefits.

How long a term should you choose? InTouch offers a wide variety of CD terms with interest rates that tend to increase as the deposits and terms increase. From a 2-month CD to a term of 60 months, you can choose a length of time that gives your money the best term of maturity for you. One of the best ways to manage CDs is to "ladder" the terms, which means opening a few, smaller accounts with successively longer terms, rather than one large one. This allows your money to become available at different times, rather than waiting for all of it at one maturity date.

The final question is, what happens to the money when the maturity date arrives? You will make this decision when creating your CD account. The two most common choices are to roll over the balance or deposit the funds in a regular savings account. A rollover means, when your CD matures, its balance (including all earned interest) is moved into a new CD, usually for the same term at the current rate. If you don’t rollover your balance, it is deposited into an existing account (savings or checking). If you are saving for a specific project, then a direct deposit might be for you. However, if you are using your CD to earn interest, and you want it to keep earning at the best rate it can, then it is a good idea to make sure that you are rolling over your funds into the most advantageous CD terms for your goals. 

Alternative CD Options

While most CDs are straightforward, there are some different options that may be on offer. One of the favorites of financial authors and gurus is what is sometimes called a “bump rate” CD. Accounts of this type offer you a one-time rise in interest rate during the term of your CD. These may require a larger deposit and/or a longer term than a fully fixed rate CD. Another option is the IRA CD, which is a CD that is embedded in an IRA account. It has the benefit of adding interest within an IRA, and continually rolling over within that account. If you opt for this kind of account, be careful to know exactly when and how you can withdraw money from the accounts, and what the tax implications will be.

You may see CDs advertised with bonus dividends or higher-than-usual rates. These CDs often require large deposits and may have other, specific terms, like funding requirements or rules about adding deposits to your other accounts. Even with the additional terms, you might find that the higher rates and bonuses make it worth the extra effort.

Finally, when you are opening a CD, be sure to specify a beneficiary. Should anything happen, your designated beneficiary would receive the funds without requiring probate proceedings. This may seem unnecessary, especially for short-term certificates, but it is good practice for every account to be included in this most basic estate planning step.

Certificates of deposit are useful financial instruments for keeping sums of money earning above the basic interest rate of a savings account. Since CDs are insured, they make a great safe investment strategy. If you are ready to put some of your money to work for you in a CD, take the next step with InTouch Credit Union.