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Although it is common knowledge that saving money is essential, the way to go about building a sum of savings varies from person to person. Banks and other financial institutions offer several products that make it easier than ever to save money. One of these products is called a Certificate of Deposit, or “CD” for short. A recent study found that most people use CDs for general savings, but they are also used to save for retirement, home purchase, higher education costs, and more.

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What is a certificate of deposit account?

Simply put, a CD is a special type of savings account with a fixed time period and interest rate. The end of the fixed term, no matter how long it is, is called the “maturity date.” Unlike a regular savings account, a certificate of deposit works where you cannot withdraw money from the account until the maturity date without paying an early withdrawal penalty. And when your account reaches maturity, you have more savings.

However, CDs have several benefits compared to typical savings accounts. The main benefit is that the interest rate on CDs (which is fixed for the duration of the term) is usually higher than the interest rate on regular savings accounts. Also, because the interest rate is fixed and doesn’t fluctuate, you can enjoy guaranteed higher returns even if banks drop rates on other savings accounts. And because a certificate of deposit is FDIC insured and has guaranteed returns, they are considered one of the safest savings options.

You learned how a certificate of deposit works, now what?

As with any savings account, it is important to do your research when choosing a CD. Different banks will offer different term lengths and interest rates; since you cannot withdraw your money from a CD without paying the penalty, you should first decide how long you could go without your cash while it earns interest and then see which banks offer the best interest rates for that term length.

We recommend checking with your bank first because CDs can be a great tool to save for the future.

*DISCLAIMER: this educational article is for informational purposes only. We highly recommended you consult your financial advisor for financial advice.

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