Certificate of Deposit (CD) accounts have been a longstanding tool for saving towards short- or long-term financial goals. Originating in the 1600s with the European banking system, CDs have evolved into a popular financial instrument offered by banks and credit unions today.
What Is a Certificate of Deposit?
A Certificate of Deposit (CD), also known as a time or term deposit, is a specialized savings vehicle where deposited funds remain locked for a predetermined period, accruing interest. Upon maturity, savers can withdraw their funds or roll them into a new CD.
Various financial institutions offer different types of CDs, including Standard, Jumbo, Step-up, Bump-up, Raise-your-rate, Add-on, and No-penalty CDs. The minimum deposit requirements vary based on the CD type and issuing institution.
CD rates correlate with the term length, usually ranging from as short as one month to up to a decade. Typically, longer terms offer higher interest rates, with FDIC or NCUA insurance protecting deposited funds at member institutions.
Who Invented Certificates of Deposit?
European banks pioneered the concept of CDs in the 1600s to incentivize savings. In the U.S., CDs gained popularity in the banking landscape post-Revolutionary War as banks introduced diverse account options, including CDs, to cater to evolving consumer demands.
Initially lacking depositor protection, the establishment of the FDIC in 1933 heralded a new era of safety for CDs, ensuring consumer confidence in the banking system.
How To Open a Certificate of Deposit
The process of opening a CD is straightforward, with many institutions facilitating online applications. Before selecting a CD, align your savings goals and compare factors such as interest rates, terms, minimum deposits, and associated fees.
Opting for a longer term can yield higher interest rates but necessitates commitment to maturity. Monthly maintenance fees are uncommon, though early withdrawal penalties apply if funds are accessed prematurely.
Can You Lose Money in a CD?
Bank-issued CDs and credit union CDs are low-risk options offering guaranteed returns. However, higher-risk CDs like Yankee or brokered CDs may pose investment risks.
What Happens to a CD if the Bank Fails?
If a bank fails, the FDIC steps in to safeguard consumer deposits, with each depositor protected up to $250,000 per ownership type per institution. However, certain CDs like Yankee CDs lack FDIC protection.
How Much Will a CD Earn in Five Years?
The interest earnings from a CD over five years hinge on the interest rate, initial deposit, and CD term. Typically, longer terms offer higher rates. Using a CD calculator can project your earnings over five years.
Are CDs a Good Investment?
CDs are ideal for risk-averse individuals seeking secure, interest-bearing savings. However, if higher returns are desired, exploring alternative investment vehicles like stocks, mutual funds, or ETFs may be more suitable.
The Bottom Line
Certificates of Deposit have a rich historical legacy, originating centuries ago in Europe to promote savings. When considering a CD, compare rates diligently, and weigh other savings options to align with your financial objectives.