Like most people, you probably have a savings account where you keep a large amount of your money. However, you probably also keep it there for long periods of time, meaning it might make sense to put that money toward a CD (Certificate of Deposit) instead.
CDs are a type of time deposit. This means that you promise the bank or credit union you’re using that they can keep your cash for a specific amount of time (usually between six months and a few years). In return, the institution promises you a higher percentage yield than you’d get from putting that money in a savings account.
While this obviously makes sense for you, you may be wondering what’s in it for the financial institutions. Knowing they can keep your money for this prolonged period of time means they can use it for long-term investment loans without having to worry that you’ll show up the next day asking for it, as could occur with a savings account. Like we said before, sometimes the term of the CD is as short as 6 months, but it could also be for as long as 60. As you can probably guess, the longer you let the bank or credit union keep your money, the higher the interest they’ll pay you for it.
Despite the terms of the agreement, it is often possible to withdraw your funds from a CD early. However, doing so will come with a penalty. Sometimes withdrawing early only costs a share of the interest you accrued. But other times, the penalty can actually cost you part of the principle as well.
After the end of your term, your money will usually be reinvested in the same type of CD unless you notify the institution of other intentions.
So long as you have money you know you won’t be using any time soon, it makes sense to use a CD to help accrue even more of it. This option is far better than letting it collect dust in a savings account.
Source:
http://banking.about.com/od/cds/a/cdbasics.htm
