What is a Certificate of Deposit (CD)?
A Certificate of Deposit is a time-bound financial product offered by banks and credit unions. When you open a CD, you agree to deposit a specific amount of money for a set period, known as the term. In return, the issuing institution pays interest on your deposit at a predetermined rate, typically at a higher rate than regular savings accounts. CDs are popular for their low-risk investment. However, there are penalties for early withdrawal.
How Do Certificates of Deposit Work?
Terms and Conditions:
When you open a CD, you choose the term length, which dictates how long your money will be locked in the account without penalties for early withdrawal. Terms can range from a few months to several years, with longer terms often offering higher interest rates.
Initial Deposit:
You'll need to make an initial deposit into the CD account. Some institutions may have minimum deposit requirements, while others offer flexibility in the amount you can deposit. HRCU offers a minimum deposit requirement as low as $500.
Interest Rates:
CDs offer fixed interest rates, meaning the rate remains the same throughout the term of the deposit. This gives you certainty about your returns, regardless of changes in the broader financial market.
Interest Payments:
Interest on CDs can be paid out in different ways:
- At Maturity: Some CDs pay out the interest along with the principal when the CD reaches maturity.
- Regular Payments: You may opt to receive periodic interest payments, such as monthly or quarterly, while the principal amount remains untouched until maturity.
- Reinvestment: Alternatively, you can choose to reinvest the interest earned back into the CD, compounding your returns over time.
Early Withdrawal Penalties:
Withdrawing funds from a CD before its maturity date typically results in penalties, such as forfeiting a portion of the interest earned or even a percentage of the principal amount. These penalties discourage early withdrawals and encourage you to keep your funds deposited for the full term.
Benefits of Certificates of Deposit
Safety:
CDs are considered low-risk investments because they are usually insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions, up to certain limits. This insurance guarantees the safety of the principal amount, protecting you from potential losses. HRCU deposits are insured up to $500,000.
Stability:
With fixed interest rates and predictable returns, CDs provide stability and assurance in an investment portfolio. This makes them a suitable choice for individuals aiming to preserve capital and minimize risk.
Higher Interest Rates:
Compared to standard savings accounts, CDs often offer higher interest rates, particularly for longer-term deposits. This allows you to earn a more competitive return on your savings over time.
Diversification:
Adding CDs to a diversified investment portfolio can help spread risk and balance out more volatile assets, like stocks or mutual funds. Diversification enhances overall portfolio stability and can mitigate potential losses during economic downturns.
Certificates of Deposit offer a secure and dependable means of saving and investing money, with guaranteed returns and minimal risk. Whether you're saving for a specific milestone or aiming to grow your wealth steadily, consider incorporating CDs into your investment strategy for a solid foundation of financial security.
If you’d like to talk to an expert about CDs and other savings-related topics, consider booking a consultation with one of our Financial Service Advisors or open a CD on our mobile app or when you login online.
