Banking Certificates of Deposit

What is a CD and Is it the Best Way to Invest? [2024]

CDs are a great way to diversify your portfolio and still get a high rate of return. I wouldn’t put all your money in one, but they are a great way to reach short-term financial goals.

By Robin Kavanagh
and Samantha Hawrylack

Edited by Jess Ullrich

Updated Dec. 17, 2024

A traditional savings account may not help you reach your financial goals. Shocking, I know. But most savings accounts at brick-and-mortar banks pay around 0.01% interest, which means you’ll earn pennies in interest on most balances.

If you’re trying to achieve big financial goals like me, you need other ways to make your money grow, like a CD or certificate of deposit. CDs often pay higher interest rates and they require that you don’t touch the funds for the duration of the term, which reduces your chances of spending the money prematurely.

Before you jump into CD investing, here’s everything you must know.

Featured CD account to consider

Lock In This Competitive Rate While You Can

Blue Federal 15 Month CD Benefits

4.70% APY on a 15-month CD¹ Rate is current as of March 12, 2024. Withdrawals may be made 7 days after opening. If you withdraw the balance from your CD prior to maturity, an early withdrawal penalty will be assessed based on the term of the CD and the principal. CDs that are renewed at maturity can be canceled within 7 days of opening without early withdrawal penalty.
$1 minimum deposit
NCUA insured
SOC 2 certified organization

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What is a CD (certificate of deposit)?

A CD is a special type of deposit account offered by banks and credit unions. It provides you with a safe place to hold your money for a set period of time. Banks offer a higher interest rate or annual percentage yield (APY) than what most other deposit accounts offer, including high-yield savings or money market accounts.

CD rates in general tend to be higher than those banks and credit unions offer on savings or money market accounts. That’s because banks want to encourage customers to keep their money within its organization. Banks earn money by lending to businesses and customers. To encourage people to commit money to a CD, banks often apply higher interest rates than for other types of savings products. Some banks even offer promotional rates, so it pays to shop around for the best CD rates before committing to one.

Despite the fact that the financial institution uses your money to lend money to other people, your money is generally safe earning interest in a CD — so long as you open an account with a bank insured by the Federal Deposit Insurance Commission or a credit union insured by the National Credit Union Share Insurance Fund. Both offer deposit insurance — up to $250,000 of your money in your account is protected should the bank not be able to provide the money when you want it or when the CD matures.

Tip

Good to know: APY is the amount of interest earned over the course of a year when compounded. Many types of CDs compound interest during the length of the CD term. The more often interest is compounded, the more money you earn.

How do CDs work?

When you open a CD account, you can choose from several types of accounts. Each will have a time frame for keeping your money in the account and an interest rate or APY.

You may also find that banks offer different types of interest rates for CDs including:

A fixed rate that won’t change from start to finish
A variable rate that will increase and decrease according to the bank’s guidelines
A “bump up” rate that allows you to request a one-time increase if rates go up

It’s important to read each CD’s fine print, though. Some may charge a penalty fee if you withdraw funds before the CD expires or require a minimum opening deposit. Knowing the terms is essential so you earn the funds you intended.

CD ladders

If investing all your money into a single CD with one maturity worries you, consider a CD ladder. This is when you open multiple CDs with different maturity dates and divide your money between them.

For instance, instead of investing $6,000 in a 30-month CD with a 3.75% APY, you might invest $2,000 in a one-year CD with a 4.5% APY; $2,000 in an 18-month CD with a 4.25% APY; and $2,000 in a two-year CD with a 4.0% APY. This allows you access to a portion of the funds every so often, allowing you to use them or reinvest them in another CD.

The benefits of opening a CD account

Like any bank product, there are pros and cons of opening a CD account. Here are the benefits to consider:

Earn passive income
The early withdrawal penalty may eliminate the temptation to spend
CDs at FDIC insured banks or NCUA insured credit unions are safe
You know before investing how much interest you’ll earn
Large number of options

The drawbacks of opening a CD account

It’s important to consider the downsides of a CD, including:

You can’t touch the money before maturity (or you’ll pay a penalty)
If interest rates increase, you can’t take advantage until the CD matures

CD account vs. traditional savings account: What’s the difference?

When choosing between a CD vs traditional savings account, consider the following:

Deposits and withdrawals: Traditional and online savings accounts allow deposits and withdrawals at any time; however the bank may limit the number of withdrawals you make. You must leave money tied up in a CD until it matures and you can’t make additional deposits to it.
Interest: Savings accounts and CDs both earn interest, but CDs usually have higher rates, especially for longer terms.
Penalty fee: You can withdraw your funds from a CD early, but you’ll pay a penalty, such as three months of interest, in some cases. Savings accounts don’t penalize you for early withdrawals.

Featured High Yield Savings Accounts

4.8

Earn up to 4.75% APY

Earn up to 4.75% APY² LevelUp Rate of 4.75% Annual Percentage Yield (“APY”) is applied to the full balance of LevelUp Savings accounts that receive a total of at least $250 in deposits during the Evaluation Period. Otherwise, accounts will earn the Standard Rate of 3.75% APY. Interest payments, account bonuses, account credits and reversals or refunds from the bank are not considered deposits for rate evaluation purposes. All LevelUp Savings accounts earn the LevelUp Rate at account opening and continue to earn the LevelUp Rate until the First Evaluation Period, to provide an opportunity to set up deposits. An Evaluation Period is a statement cycle. The First Evaluation Period will be the third statement cycle after you open your account, with any rate change becoming effective the next statement cycle. For example, if you open in August, the first Evaluation Period would be October with any rate change effective in November. Any rate changes will take place on the second business day and will be based on deposits in the previous statement cycle. APY accurate as of 11/25/2024. Rates are variable and subject to change at any time without notice, at the sole discretion of the bank. Fees may reduce earnings. $0 minimum opening deposit. when you open a new LevelUp Savings account and deposit $250+ per month. Member FDIC.

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5.0

SoFi Checking & Savings - Earn Up to $300 When You Set Up Direct Deposit

Earn up to 4.00% APY³ New and existing Checking and Savings members who have not previously enrolled in Direct Deposit with SoFi are eligible to earn a cash bonus of either $50 (with at least $1,000 total Direct Deposits received during the Direct Deposit Bonus Period) OR $300 (with at least $5,000 total Direct Deposits received during the Direct Deposit Bonus Period). Cash bonus will be based on the total amount of Direct Deposit. Direct Deposit Promotion begins on 12/7/2023 and will be available through 1/31/2026. Full terms at <a href="http://sofi.com/banking">sofi.com/banking</a>. SoFi Checking and Savings is offered through SoFi Bank, N.A., Member FDIC. SoFi members with Direct Deposit can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the 4.00% APY for savings (including Vaults). Members without Direct Deposit will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Interest rates are variable and subject to change at any time. These rates are current as of Dec. 3, 2024. There is no minimum balance requirement. Additional information can be found at <a href="http://www.sofi.com/legal/banking-rate-sheet">http://www.sofi.com/legal/banking-rate-sheet</a> and collect up to a $300 cash bonus with direct deposit or $5,000 or more in qualifying deposits.⁴ SoFi members with Direct Deposit or $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. Members without either Direct Deposit or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Only SoFi members with direct deposit are eligible for other SoFi Plus benefits. Interest rates are variable and subject to change at any time. These rates are current as of Dec. 3, 2024. There is no minimum balance requirement. Additional information can be found at <a href="http://www.sofi.com/legal/banking-rate-sheet">http://www.sofi.com/legal/banking-rate-sheet</a> FDIC Insured.⁵ SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/terms">SoFi.com/banking/fdic/terms</a> See list of participating banks at <a href="http://sofi.com/banking/fdic/receivingbanks">SoFi.com/banking/fdic/receivingbanks</a>

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FAQs

Are CDs a good investment?

CDs are generally a safe, low-risk investment. If the interest you earn is good and the terms suit your needs, investing money in one can be a good thing. It all depends on what you want to accomplish by saving your money in a CD. If you are thinking about opening one, make sure you shop around for the best CD rates and terms to find the right financial product for you.

Can you lose money in a CD?

Most likely, you won’t lose money in a CD if your bank or credit union is federally insured. This means that if the bank were to fail, the federal government will insure up to $250,000 in your CD. The amount you deposit into the account will be returned to you when the CD matures.

If you’ve chosen a CD with a variable interest rate, the amount of interest earned may go down while the account accrues interest, but this isn’t a loss of money; it’s a reduction in the amount of new money earned.

How much money should you put in a CD?

It depends on your situation. Most CDs don’t have a minimum deposit, but many banks offer higher interest rates for larger deposits. You should also keep in mind that your money will not be accessible, so make sure the amount you invest in a CD is money you can afford to have out of reach for the length of the term.

Are there better options than a CD?

If you’re looking for a higher rate return, investing in the stock market is an option to consider. Those investments can pay more than you’d earn in interest with a CD, but there is a risk of losing money.

High-yield savings accounts are also a good option. Their interest rates may not be as high as a CD’s, but many banks offer comparable rates. For example, the Aspiration Spend & Save account offers an APY up to 3.00% if you meet certain terms. Plus, with a savings account, there are no fixed terms to worry about, so you’ll also be able to add and take out money if needed for an emergency.

Bottom line

I love CDs to diversify some of my investments. I like to keep a portion of my portfolio as safe as possible, and CDs allow me to do that without losing earnings. As long as you can be without the funds you deposit in a CD for the entire term, you can make your money grow and have a “for sure” investment.

As always, take some time to think through your financial goals for the money you want to put aside for savings and shop around for the best banks and accounts that will work for your situation. There are lots of CD accounts available with traditional and online banks and credit unions and they’re all competing for your business.