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A Beginner's Guide to Certificates of Deposit
Personal Finance
Education
| 09.16.2024
If you want to learn more about certificates of deposit but don't know where to begin, start here!
This beginner's guide will provide you with an overview of what a certificate of deposit is, how it works, the different factors you should consider when deciding which term is right for you and how to use a CD calculator to help estimate potentials savings.
What is a Certificate of Deposit?
A certificate of deposit, also known as a CD, is a type of savings account that offers a higher interest rate than a traditional savings account. A CD is a low-risk, federally insured savings account that may help you reach your financial goals, typically for something more long-term.
When you open a CD, you agree to leave your money in the account for a specific amount of time, called the CD term. This term can range from a few months to several years. The longer the term, the higher the interest rate typically offered (you can find current Merchants Bank CD rates and terms on our Rates page). During this time, the bank pays you a fixed interest rate on the funds within your CD account. Once the term ends, you can withdraw the money, along with the accrued interest. However, if you withdraw the money before the end of the term, you may be charged an early withdrawal penalty, as well as forfeit a portion of the interest you’d otherwise be earning. CDs offer a higher return on your money while keeping it safe and secure.
Shalana Smith, our Universal Banker in Northfield shares, “A CD is a great way to have your money grow. When working with customers, we discuss the amount of money they are comfortable setting aside as well as what term/length of time would work best. From there, customers can just let the money sit and earn interest!”
CDs are considered a low-risk investment option because they are insured by the FDIC (Federal Deposit Insurance Corporation), meaning that your funds are protected up to $250,000 per depositor, per insured bank.
Savings vs. CD
You may be wondering what makes a certificate of deposit different from a traditional savings account. In summary, you’ll give up some flexibility with a CD but earn more money (sometimes much more) on your deposit balance overall.
Here’s a quick comparison:
When deciding between a CD or traditional savings account, you’ll want to weigh all of these factors. “For most people, the decision maker is how liquid their funds need to be,” explains Kori Hillestad, Universal Banker in Onalaska. “For example, do they need access to funds before a certain date? We can always open a combination of accounts to meet their goals, considering their entire financial picture.”
It’s also helpful to use a CD calculator and savings calculator to estimate what you may earn on either account based on current rates. To use a calculator, you’ll need to be ready to input the following:
Benefits of Investing in a CD
Investing in a CD offers numerous benefits, especially for those who prioritize low-risk, predictable returns.
As mentioned above, CDs generally offer higher interest rates than traditional savings accounts, meaning that investors can grow their money more quickly. Second, CDs provide guaranteed returns, which can offer peace of mind for those who want to protect their savings from market fluctuations. Additionally, CD accounts are FDIC-insured, meaning that they are a safe and secure investment option. For those looking for a low-risk, dependable way to grow their savings, a CD may be a smart choice.
Choosing the Right CD Term for You
When it comes to choosing the right CD term, it is important to consider your financial goals and timeline. Generally, the longer the CD term, the higher the interest rate, but you'll also have less liquidity. If you anticipate needing the funds sooner, a shorter-term CD may be a better option. You should also review the penalties for early withdrawal before making a decision.
Here are two examples to illustrate why the right CD term matters.
Dream house down payment – you are saving for a down payment on your dream home, a place that you don’t envision buying for at least a few years. You already have $5,000 saved and you’d like it to earn more interest on that money. In this case, a CD with a longer term could be a great fit. You’ll be able to deposit the $5,000 you have saved and earn a higher interest rate with a CD term that aligns with your home buying timeline.
Preparing for tax time – it’s fall, and you’re interested in putting aside money to prepare for the upcoming tax season. Even though its months away, you’d like to place your money in an account you can’t touch. In this case, a CD with a shorter term makes the most sense so you can set aside the money now and have access to it next spring.
What is CD Laddering?
One strategy that enables you have a mix of short and long-term savings for more flexibility is called CD laddering. Laddering CDs means dividing your investment or dollars across multiple CDs with different terms and maturity dates. For example:
CD #1 - $2,000, matures in 6 months with lowest interest rate
CD #2 - $4,000, matures in 12 months with an average interest rate
CD #3 - $7,000 matures in 36 months with the highest interest rate
This strategy allows you to access some of your money periodically while still earning a higher interest rate than traditional savings accounts. “Customers like this strategy as it gives them regular access to portions of funds while still allowing them to take advantage of our CD rates. It’s a great savings tool,” says Shalana.
Your banker can help you come up with a CD laddering strategy that maximizes your earnings and saves you time.
It is essential to align your choice of a CD with your overall financial goals and risk tolerance. Consulting with a banker is beneficial for crafting a well-rounded strategy that incorporates CDs or other investment opportunities to meet your individual needs. Ultimately, by carefully assessing your financial situation and long-term objectives, it’s possible to make informed decisions about whether CDs are the right fit for you!
Check out Merchants Bank's CD calculator.
This beginner's guide will provide you with an overview of what a certificate of deposit is, how it works, the different factors you should consider when deciding which term is right for you and how to use a CD calculator to help estimate potentials savings.
What is a Certificate of Deposit?
A certificate of deposit, also known as a CD, is a type of savings account that offers a higher interest rate than a traditional savings account. A CD is a low-risk, federally insured savings account that may help you reach your financial goals, typically for something more long-term.
When you open a CD, you agree to leave your money in the account for a specific amount of time, called the CD term. This term can range from a few months to several years. The longer the term, the higher the interest rate typically offered (you can find current Merchants Bank CD rates and terms on our Rates page). During this time, the bank pays you a fixed interest rate on the funds within your CD account. Once the term ends, you can withdraw the money, along with the accrued interest. However, if you withdraw the money before the end of the term, you may be charged an early withdrawal penalty, as well as forfeit a portion of the interest you’d otherwise be earning. CDs offer a higher return on your money while keeping it safe and secure.
Shalana Smith, our Universal Banker in Northfield shares, “A CD is a great way to have your money grow. When working with customers, we discuss the amount of money they are comfortable setting aside as well as what term/length of time would work best. From there, customers can just let the money sit and earn interest!”
CDs are considered a low-risk investment option because they are insured by the FDIC (Federal Deposit Insurance Corporation), meaning that your funds are protected up to $250,000 per depositor, per insured bank.
Savings vs. CD
You may be wondering what makes a certificate of deposit different from a traditional savings account. In summary, you’ll give up some flexibility with a CD but earn more money (sometimes much more) on your deposit balance overall.
Here’s a quick comparison:
| Certificate of Deposit | Traditional Savings |
| Higher rates | Lower rates |
| Money stays in CD for entire account term | Money can be withdrawn based on account terms |
| Does not allow for additional deposits | Can deposit money anytime |
| Insured up to FDCI limit | Insured up to FDIC limit |
When deciding between a CD or traditional savings account, you’ll want to weigh all of these factors. “For most people, the decision maker is how liquid their funds need to be,” explains Kori Hillestad, Universal Banker in Onalaska. “For example, do they need access to funds before a certain date? We can always open a combination of accounts to meet their goals, considering their entire financial picture.”
It’s also helpful to use a CD calculator and savings calculator to estimate what you may earn on either account based on current rates. To use a calculator, you’ll need to be ready to input the following:
- How much you’d like to deposit into the CD or savings account
- The amount you’d like to add and how often (applies to a savings account only)
- The time frame for saving (months vs. years)
- The interest rate
- How often the interest is compounded (monthly, quarterly, annually, etc)
Benefits of Investing in a CD
Investing in a CD offers numerous benefits, especially for those who prioritize low-risk, predictable returns.
As mentioned above, CDs generally offer higher interest rates than traditional savings accounts, meaning that investors can grow their money more quickly. Second, CDs provide guaranteed returns, which can offer peace of mind for those who want to protect their savings from market fluctuations. Additionally, CD accounts are FDIC-insured, meaning that they are a safe and secure investment option. For those looking for a low-risk, dependable way to grow their savings, a CD may be a smart choice.
Choosing the Right CD Term for You
When it comes to choosing the right CD term, it is important to consider your financial goals and timeline. Generally, the longer the CD term, the higher the interest rate, but you'll also have less liquidity. If you anticipate needing the funds sooner, a shorter-term CD may be a better option. You should also review the penalties for early withdrawal before making a decision.
Here are two examples to illustrate why the right CD term matters.
Dream house down payment – you are saving for a down payment on your dream home, a place that you don’t envision buying for at least a few years. You already have $5,000 saved and you’d like it to earn more interest on that money. In this case, a CD with a longer term could be a great fit. You’ll be able to deposit the $5,000 you have saved and earn a higher interest rate with a CD term that aligns with your home buying timeline.
Preparing for tax time – it’s fall, and you’re interested in putting aside money to prepare for the upcoming tax season. Even though its months away, you’d like to place your money in an account you can’t touch. In this case, a CD with a shorter term makes the most sense so you can set aside the money now and have access to it next spring.
What is CD Laddering?
One strategy that enables you have a mix of short and long-term savings for more flexibility is called CD laddering. Laddering CDs means dividing your investment or dollars across multiple CDs with different terms and maturity dates. For example:
CD #1 - $2,000, matures in 6 months with lowest interest rate
CD #2 - $4,000, matures in 12 months with an average interest rate
CD #3 - $7,000 matures in 36 months with the highest interest rate
This strategy allows you to access some of your money periodically while still earning a higher interest rate than traditional savings accounts. “Customers like this strategy as it gives them regular access to portions of funds while still allowing them to take advantage of our CD rates. It’s a great savings tool,” says Shalana.
Your banker can help you come up with a CD laddering strategy that maximizes your earnings and saves you time.
It is essential to align your choice of a CD with your overall financial goals and risk tolerance. Consulting with a banker is beneficial for crafting a well-rounded strategy that incorporates CDs or other investment opportunities to meet your individual needs. Ultimately, by carefully assessing your financial situation and long-term objectives, it’s possible to make informed decisions about whether CDs are the right fit for you!
Check out Merchants Bank's CD calculator.
Interactive calculators are available for your independent use and are not intended to provide investment or tax advice. We do not guarantee their applicability or accuracy in regards to your individual situation. All examples are hypothetical. We encourage you to seek advice from qualified professionals regarding your personal finances.
