Personal Finance 101: What Is a Certificate of Deposit?


What does ‘laddering’ CDs mean, anyway? We explain that strategy and more. Photo: van Ort

If you’re looking for a place to stash your money for a longer period of time than a regular checking or savings account, you may have investigated a certificate of deposit, or CD. This article will break down everything you need to know about CDs, including pros and cons, the best CD rates and investment strategies, and alternative places to park your cash.

What Is a Certificate of Deposit?

A CD is a low-risk investment product sold by banks, credit unions, and brokerages. Your deposit is insured by the Federal Deposit Insurance Corp. up to $250,000.

Unlike a savings account, when you put your money into a CD, you’re typically agreeing not to touch it for a certain period of time, called a term. You can get a CD with all sorts of terms, but they are commonly as short as three months or as long as five years. In most cases, if you need your money before your term is up, you’ll have to pay a penalty. The penalty varies from bank to bank, but a fee equal to three to six months’ interest is common for a one-year CD, reports Bankrate.

While your money is in the CD, it earns interest. This is denoted as annual percentage yield, or APY. You’ll know the APY before you put your money in the CD. Generally, your CD rates will hinge on how much you are willing to invest and how long you’re willing to keep your hands off it. Larger amounts and longer terms mean you’ll earn more interest, which is taxable.

Types of CDs

There are several varieties. Be sure to investigate all of them, since a lesser-known CD might be a better fit for your financial situation:

  • Traditional CD: This is the simplest, most straightforward CD. Put your money in for a fixed time period for a fixed interest rate, such as one year. Don’t touch it for that period, and when your term is up, you’ll get your deposit back plus interest. If you have to dip into your money before your term is up, you could face a penalty.
  • Variable-rate CD: Instead of a fixed interest rate, a variable-rate CD offers an interest rate that will adjust in concert with certain rate indexes (this will vary from bank to bank). So you assume a bit more risk here: If rates go up, you could earn more on your deposit than with a traditional CD; if rates go down, the opposite would be true.
  • Bump-up CD: A bump-up CD gives you a chance to “bump up” to a new, better interest rate if your bank raises rates on CDs similar to yours during a certain time frame. You can usually only do this once, or possibly twice during a longer term.
  • Liquid/no-penalty CD: If you’re a commitment-phobe, a liquid or no-penalty CD lets you take your cash, plus interest earned, and run before your term is up. However, you’ll probably earn a lower interest rate for this convenience.
  • Callable CD: Get a callable CD and your bank will pay you a higher interest rate, but the catch is they can “recall” it before the term is over — typically when rates have fallen far below the one you nabbed when you got the CD. You’ll get your deposit back and any interest earned until that point.
  • Jumbo CD: A jumbo CD is basically just a CD that requires a large minimum deposit, like $100,000, and pays a higher interest rate in return.
  • IRA CD: An IRA CD is simply a CD that you invest in as part of an individual retirement account, which is a tax-advantaged account where you stash your money. The IRA can have several kinds of and assets — not just CDs. Though very low-risk, CDs probably aren’t the best way to grow money in a retirement account because the return will be very low.

Pros and Cons of CDs

Now that you know some of the basics, are you wondering whether a CD is for you? Here are some of the advantages and disadvantages of CDs to help you decide:


  • Low risk: If you want to take baby steps into the world of investing, a CD could be a good first step. You’re guaranteed to get your deposit back, plus the specified APY, which you know in advance.
  • Ease of use: You can easily open a CD yourself, without the assistance of a financial adviser. Additionally, with most CDs, you can “set it and forget it”: That is, once you’ve opened your CD and put your money in, you don’t have to do much else.
  • Higher interest rates (at most traditional banks): Traditionally, CD rates are higher than savings account rates to entice you to part with your money for the specified term. This is still mostly true when it comes to brick-and-mortar banks and credit unions. However, it might not be the case when you factor in some high-yield savings accounts online, which I’ll return to later in this article.


  • Low liquidity: Since you’ll face a penalty fee if you need to take money out of your CD before your term is up, it’s not the best place to put any money that you need ready access to, such as an emergency fund.
  • Lower interest rates (compared to other investments): While some CD rates may be higher than certain savings account rates, you’re not going to earn anything approaching what you could earn with more aggressive, higher-risk investments.

What Are the Best CD Rates Today?

CDs aren’t known for their high yields. As is par for the course in the world of investing, the lower your risk, the lower your return. According to a national rate survey by Bankrate, a one-year CD was averaging 0.27% APY in mid-August 2015, while a five-year CD was averaging 0.86%. In comparison, savings accounts were averaging 0.09%.

Of course, you can do better than the national average by doing a little research — even without a massive opening deposit. If you can part with your money for only one year, Synchrony Bank is offering 1.25% APY on one-year CDs with a minimum deposit of $2,000. Got another year? Synchrony will bump your APY to 1.45% for a two-year CD with the same minimum deposit. Sallie Mae is also offering 1.25% APY on one-year CDs with a slightly larger minimum deposit, $2,500.

If you can keep your hands off your money for five years, EverBank is offering 2.25% APY with a minimum deposit of $1,500. Ally Bank is offering 2.0% APY without any minimum opening deposit. Discover Bank is offering 2.3% APY on its 10-year CDs.

You can continue to look around by using our CD search tool below. Simply input your desired term and minimum deposit to find some of the best CD rates available.

How Can I Maximize My CD Interest Rates?

While CD rates are low, there are a few investment strategies you can use to boost your return, with the added bonus of creating more chances to access your money penalty-free.

CD Laddering

Laddering, the most popular CD investing strategy, helps you enjoy a higher interest rate while maintaining access to at least some of your cash — making a CD ladder a candidate for part of your emergency fund. You divide your investment into equal portions and put each portion into a CD with a different term. Once the CD with the shortest term matures, you reinvest it in a longer-term, higher-rate CD. You keep doing that once each CD matures so that eventually every CD will have a higher rate, with one maturing every year.

Let’s look at an example: You have $15,000 to invest. You divide it into five $3,000 chunks, and put each $3,000 into CDs with terms of one, two, three, four, and five years. Once your one-year CD matures, you take your deposit and interest and put it in a five-year CD. You do the same once the two-year CD matures, and so on. After five years, all of your CDs have five-year terms and a more favorable interest rate, but you’ll still be able to access part of your cash since one will mature every year.

CD Barbells and Bullets

CD barbells and bullets require a bit more awareness of the interest-rate climate to be as effective as possible.

With a CD barbell, you invest in a short-term and a long-term CD at the same time. Once the short-term CD matures, you have the flexibility of deciding what to do with the money — for instance, hold on to it, or reinvest it in another short- or long-term CD, depending on interest rate trends — while knowing the other portion of your money is earning a higher interest rate in the longer-term CD.

With a CD bullet, you aim to have several different CDs mature at once. This is best if you’re betting interest rates will rise, or you’re saving for a particular purpose and won’t need the money until after the CDs mature. For example, maybe you want to invest some of your money in a five-year CD now, and then in two years, some in a three-year CD, and then in two more years, a couple of one-year CDs. All of these CDs mature at the same time, but you still had access to at least a portion of your money until the last year.

Alternatives to CDs

If you’re not quite sold on CDs, there are some other low-risk alternatives that might be a better fit — some more liquid than CDs, and some less so.

High-Yield Savings Accounts

A high-yield savings account offers a beefier interest rate than the paltry national savings account average, which is 0.09% in August 2015, according to Bankrate. Online, you can find high-yield savings accounts offering 1.0% APY or more. That beats the national average for a one-year CD, 0.27% APY, by a mile. And it’s not much lower than the one-year high-yield CDs we mentioned above.

Perhaps the bigger advantage with high-yield savings accounts, however, is that you’ll still be able to access your money when you need it. That makes these accounts a better pick for any money you need to be able to withdraw quickly and penalty-free, such as an emergency fund.

Of course, if you opt for a high-yield CD online or open one with a higher balance or longer term, a CD can still beat these accounts when it comes to APY. Savings accounts also offer a bit less certainty when it comes to interest since the rate can fluctuate with the market — good or bad. On the other hand, a traditional CD will have a fixed rate for its entire term.

Money Market Accounts

For bank customers, a money market account, or MMA, is very similar to a high-yield savings account. Whichever way you go, you’ll have the same access to your cash. The major difference is on the bank’s end — it can put your balance in low-risk investments such as CDs and bonds instead of simply using it for loans.

You may need a larger opening deposit for an MMA than a savings account ($1,000 is common), but this depends on the bank. Interest rates will be higher for MMAs than savings accounts at brick-and-mortar banks, but the difference compared with high-yield savings accounts online is negligible.

Bottom line: Both an MMA and a high-yield savings account, particularly online, can provide a more liquid alternative to a CD without a huge interest-rate hit. And they’re still FDIC-insured, unlike more sophisticated investments.

U.S. Savings Bonds

Series I

Series I U.S. savings bonds are an interesting alternative to longer-term CDs. You can buy them directly from the government in any amount from $25 up to $10,000. They are slightly less liquid than CDs because you aren’t allowed to redeem them for at least a year after purchase, and even then you will pay a penalty of three months’ interest if you haven’t had the bond for at least five years. They don’t fully mature for 30 years. But they do have some tax benefits: You don’t have to pay state or local taxes on this investment.

In August 2015, these bonds were earning 0.00% interest. Yep, that’s a big fat goose egg. But before you write off savings bonds, consider this: The government also sets an inflation rate for bonds. This rate, which will change every six months, ensures that you never lose money due to inflation. Even in periods of deflation (like right now) the bond’s composite rate (the combined fixed interest rate and inflation rate) is never allowed to go below 0.00%.

For now, CDs are a better bet interest-wise, but if inflation starts to rise sharply, that might not always be the case, especially if you can invest for a long time.

Series EE

On the surface, a Series EE savings bond is a lot like Series I: You get the same tax benefits and can buy them in the same values. They mature in the same time frame, you can’t redeem them for at least a year, and you pay the same interest penalty during the first five years.

Unlike Series I bonds, EE bonds are currently paying a fixed interest rate of 0.30%. Still nothing to write home about, but if you can hold on to your EE bond for 20 years, it will double in value — so if you put away $5,000, after 20 years, suddenly you’ll have $10,000.

Of course, only you can decide whether you’re willing to part with your money for that long. You could always buy a five-year CD, then reinvest the money depending on what interest rates are doing. In general, very low interest rates like today’s make EE bonds a better deal — but they’re also unlikely to stay so low for the next two decades.

Treasury Bills, Bonds, and Notes

You can buy a variety of securities directly from the government, and since Uncle Sam backs these investments, your risk is negligible. Like the savings bonds above, you’ll also pay no state or local taxes on them. There is no penalty for selling before they mature, though commissions may apply if you use a broker.

  • Treasury bills are for the short term — they range from four weeks to one year. You buy them in multiples of $100, but at a discount. When the term is over, you receive face value. One-year Treasury bills have netted roughly 0.3% to 0.4% in August 2015 — for now, you can do better with a one-year CD, as long as you’re willing to shop around.
  • Treasury notes can be bought for two-, three-, five-, seven-, and 10-year terms, also in multiples of $100. Interest is paid semi-annually. Two-year notes have recently yielded roughly 0.67% to 0.74%. At the other end of the spectrum, 10-year notes have yielded 2.14% to 2.28%. Right now, there are five-year CDs that are competitive with those 10-year rates with the added bonus of locking up your money for only half the time.
  • Treasury bonds are longer-term investments that mature in 30 years. They are also sold in multiples of $100 with interest paid semi-annually. Recently, yields have hovered just under 3%, beating five-year CDs — but you’ll need to lock your money up for a lot longer.

Overall, CDs still look like the better bet right now. But that could change as the overall rate climate changes, too — so stay tuned.

Shop Around for the Best CDs

It should be clear by now that you won’t get rich off a certificate of deposit, but you can still manage a decent interest rate by shopping around. A quick search online reveals several CDs yielding several times the national average, so remember that you don’t need to settle for whatever paltry APY your bank may be offering. You can start your search with the rate tool below.

Want more advice on CDs? Check out some of our past articles:

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