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A certificate of deposit (or CD) is an account you leave untouched for a set time while it grows interest. You choose your term length 3 and how much money to deposit. Along with earning interest, the. Step Rate CD Rates $2,500 minimum opening deposit A Step Rate CD (Time Account) is a 24-month CD featuring guaranteed interest rate increases and one penalty-free withdrawal every six months. A CD is a type of deposit account that can pay a higher interest rate than a standard savings account in exchange for restricting access to your funds during the CD term — often between three. An account owner's interest in the insurable balance of a College Savings Bank, a Division of NexBank CD account is insured by the FDIC on a pass-through basis, together with any other deposit accounts the account owner holds at College Savings Bank, a Division of NexBank, in the same right and capacity, up to the maximum amount. The more often the CD compounds, the faster your savings will grow. DEFINE THE MINIMUM DEPOSIT FOR A CD. The answer varies by account, but most CDs credit interest monthly. Some may allow you to.

Savings accounts, money market accounts and certificates of deposit (CDs) are all viable options for setting aside your money and watching it grow. These three kinds of accounts share similarities, but they work differently and may serve different purposes.

Savings accounts, money market accounts and CDs typically differ in terms of their interest rates, restrictions, benefits, fees and level of risk. Furthermore, a savings account or money market account may make sense for short-term savings, while a CD is better suited for longer-term savings needs.

Interest rates for deposit accounts can go up or down based on rate-setting actions taken by the Federal Reserve. As of January 2021, Federal Reserve interest rates are historically low due to economic conditions caused by the ongoing pandemic. While low rates could make savings accounts, money market accounts and CDs less attractive to some, they remain good options for short-term or easily accessible savings.

Here, we'll review the pros and cons of these three types of accounts, and equip you with the answers you need before setting up a savings account, money market account or CD.

Savings Accounts

A savings account at a bank, credit union or other financial institution gives you a place to park money you plan to use for short-term needs, such as paying for a wedding or making a car down payment, or establishing an emergency fund you can access easily.

Money deposited in a traditional savings account earns interest, but not much. As of January 2021, the average interest rate (known as annual percentage yield, or APY) for a U.S. savings account was only 0.05% for a balance below $100,000, according to the Federal Deposit Insurance Corp. (FDIC). A yield of 0.05% would earn you just $2.50 per year on a $5,000 balance.

A high-yield savings account, often provided by online banks, can deliver an APY that's higher than a traditional savings account. But if you open a high-yield savings account at an online bank, be sure you're comfortable with the possibility that you may lack easy access to branches or ATMs.

The FDIC insures savings up to $250,000 per account holder at federally insured banks. If a bank fails and your savings account has less than $250,000 in it, the FDIC guarantees your money will be protected. If the savings account is at a credit union, the National Credit Union Administration (NCUA) insures the money under the same guidelines.

Keep in mind that a savings account is restricted to six withdrawals per month—a limit not imposed on checking accounts. If you exceed the six-withdrawal threshold, your savings account may be switched to a checking account. After the coronavirus outbreak was declared a pandemic in March 2020, the Federal Reserve temporarily suspended the six-withdrawals-per-month limit.

What to Consider When Opening a Savings Account

Here are some questions to ask when you're looking for a place to open a savings account:

• Is a minimum deposit required? In many cases, a minimum deposit is not required. But if it is, it'll likely be $25 or $50.
• What is the APY? Before opening an account, check to see what the interest rate is, and whether the rate is fixed or variable.
• What are the fees? Investigate the types of fees you may be charged. You might, for instance, be charged an account maintenance fee if your balance dips below a certain amount.
• Can I use a mobile app? Financial institutions that offer a mobile app provide an easier way to manage your savings account.
• How quickly can I get my money? Consider how long it might take to obtain your money if you can't visit a branch or ATM.

Money Market Accounts

Cd Savings For Child

As with a savings account, a money market account is insured by the FDIC or NCUA, and it has withdrawal limits.

However, a money market account generally offers a higher APY than a traditional savings account. That's because cash in a money market account is invested in the financial markets. As of January 2021, the average interest rate for a money market account was 0.07% for a balance below $100,000 (compared with 0.05% for a savings account).

Unlike a savings account, you may be able to write checks with a money market account.

What to Consider When Opening a Money Market Account

Questions to ask before you open a money market include:

• What is the minimum deposit? For a money market account, the minimum deposit may be higher than a savings account requires.
• What is the APY? While the interest rate for a money market account may be higher than it is for a traditional savings account, you'll still want to inquire about the APY.
• What are the fees? Look into what, if any, fees the financial institution charges. For example, you might have to pay for checks, and could be charged fees if your account balance is low. (The minimum required balance on a money market account is typically higher than with a savings account.)
• Is there a mobile app? Like with a savings account, having a mobile app you can use to conveniently check your balance and manage your money can be a big help.
• How accessible is my money? How long would it take to pull cash from your account? With a money market account, you can usually make withdrawals and write checks whenever you'd like, up to a certain number of transactions per month.

Certificates of Deposit

CDs, available from banks and credit unions, are deposit accounts like savings and money market accounts, but there are key differences. When you purchase a CD, a minimum deposit is required. Furthermore, you're not allowed to withdraw money from a CD before a certain period of time expires, such as six months or two years. Otherwise, you'll be hit with a financial penalty.

Cd Savings Rates

Another disadvantage: You can't use a check, ATM or electronic transfer to access your money.

That said, CDs typically provide higher interest rates than savings accounts and sometimes money market accounts. For instance, the average APY for a six-month CD with a balance below $100,000 was 0.10% as of January 21, 2021. The average APY for a 60-month CD was 0.32%. In most cases, the interest rate for a CD doesn't change while the account is open, which is a big perk if you open it before rates are cut.

Once the CD's term ends, you can withdraw the money or roll it over to a new CD.

The FDIC and NCUA insure CDs up to the same $250,000 limit (per institution and type of account) as savings and money market accounts.

What to Consider When Opening a CD

Things to look at before you open a CD include:

• The APY: Is it competitive with other financial institutions?
• The penalty for early withdrawal: You could lose money if you make a withdrawal before the CD reaches its 'maturity' date.
• The need to quickly access money in case of an emergency: If you're nervous about tying up money in a CD, this type of account might not be the best option.

How to Choose the Right Account for Your Needs

Savings account, money market account or CD—which one should you pick?

A savings account might be a good option if you have a relatively small amount of money and aren't itching to earn a more competitive interest rate. It also might be a smart choice when you want to be able to use an ATM card or electronic transfer to access your cash.

If you've got a bigger stash of cash and you want to be able to access it easily, a money market account may be the way to go. You typically earn a higher interest rate with a money market account compared with a savings account. But you may need to stay above minimum balance requirements to avoid fees. And, just as with a savings account, the number of withdrawals per month may be limited.

To earn a potentially higher interest rate than a savings or money market account, you might park your money in a CD. But unless you keep your money in a CD for the prescribed amount of time, such as six months or 60 months, you may face a financial penalty that could erase the interest you've collected.

Cd Savings Calculator

Alternative Places to Grow Your Money

When you're selecting a spot to put your money—particularly for the long term—a savings account, money market account or CD may not be the right option. Fortunately, alternatives are available, including a 401(k), an individual retirement account (IRA) and individual stocks.

401(k)

A 401(k) is an employer-sponsored retirement account. It's an ideal vehicle for retirement savings, with income tax reductions and potential contribution matches from employers being among the benefits. The most common investment choice available through a 401(k) is a mutual fund. Investors own shares of a mutual fund, which pools money from many investors to purchase stocks, bonds and short-term debt.

Individual Retirement Account (IRA)

An IRA allows you to set aside money for retirement up to a certain annual amount, and doesn't require any involvement from your employer. Depending on the type of IRA you open at a financial institution, you can build retirement savings on a tax-free or tax-deferred basis. Investment options available through an IRA include stocks, bonds, CDs and exchange-traded funds (ETFs).

Individual Stocks

Individual stocks also are in the mix of places to put your money. When you buy a share of stock, you own a slice of a company. As with any type of investment, stocks come with risks and rewards—mainly gaining or losing your money depending on the rise and fall of stock prices.

The Bottom Line

Keep in mind that a savings account is restricted to six withdrawals per month—a limit not imposed on checking accounts. If you exceed the six-withdrawal threshold, your savings account may be switched to a checking account. After the coronavirus outbreak was declared a pandemic in March 2020, the Federal Reserve temporarily suspended the six-withdrawals-per-month limit.

What to Consider When Opening a Savings Account

Here are some questions to ask when you're looking for a place to open a savings account:

• Is a minimum deposit required? In many cases, a minimum deposit is not required. But if it is, it'll likely be $25 or $50.
• What is the APY? Before opening an account, check to see what the interest rate is, and whether the rate is fixed or variable.
• What are the fees? Investigate the types of fees you may be charged. You might, for instance, be charged an account maintenance fee if your balance dips below a certain amount.
• Can I use a mobile app? Financial institutions that offer a mobile app provide an easier way to manage your savings account.
• How quickly can I get my money? Consider how long it might take to obtain your money if you can't visit a branch or ATM.

Money Market Accounts

Cd Savings For Child

As with a savings account, a money market account is insured by the FDIC or NCUA, and it has withdrawal limits.

However, a money market account generally offers a higher APY than a traditional savings account. That's because cash in a money market account is invested in the financial markets. As of January 2021, the average interest rate for a money market account was 0.07% for a balance below $100,000 (compared with 0.05% for a savings account).

Unlike a savings account, you may be able to write checks with a money market account.

What to Consider When Opening a Money Market Account

Questions to ask before you open a money market include:

• What is the minimum deposit? For a money market account, the minimum deposit may be higher than a savings account requires.
• What is the APY? While the interest rate for a money market account may be higher than it is for a traditional savings account, you'll still want to inquire about the APY.
• What are the fees? Look into what, if any, fees the financial institution charges. For example, you might have to pay for checks, and could be charged fees if your account balance is low. (The minimum required balance on a money market account is typically higher than with a savings account.)
• Is there a mobile app? Like with a savings account, having a mobile app you can use to conveniently check your balance and manage your money can be a big help.
• How accessible is my money? How long would it take to pull cash from your account? With a money market account, you can usually make withdrawals and write checks whenever you'd like, up to a certain number of transactions per month.

Certificates of Deposit

CDs, available from banks and credit unions, are deposit accounts like savings and money market accounts, but there are key differences. When you purchase a CD, a minimum deposit is required. Furthermore, you're not allowed to withdraw money from a CD before a certain period of time expires, such as six months or two years. Otherwise, you'll be hit with a financial penalty.

Cd Savings Rates

Another disadvantage: You can't use a check, ATM or electronic transfer to access your money.

That said, CDs typically provide higher interest rates than savings accounts and sometimes money market accounts. For instance, the average APY for a six-month CD with a balance below $100,000 was 0.10% as of January 21, 2021. The average APY for a 60-month CD was 0.32%. In most cases, the interest rate for a CD doesn't change while the account is open, which is a big perk if you open it before rates are cut.

Once the CD's term ends, you can withdraw the money or roll it over to a new CD.

The FDIC and NCUA insure CDs up to the same $250,000 limit (per institution and type of account) as savings and money market accounts.

What to Consider When Opening a CD

Things to look at before you open a CD include:

• The APY: Is it competitive with other financial institutions?
• The penalty for early withdrawal: You could lose money if you make a withdrawal before the CD reaches its 'maturity' date.
• The need to quickly access money in case of an emergency: If you're nervous about tying up money in a CD, this type of account might not be the best option.

How to Choose the Right Account for Your Needs

Savings account, money market account or CD—which one should you pick?

A savings account might be a good option if you have a relatively small amount of money and aren't itching to earn a more competitive interest rate. It also might be a smart choice when you want to be able to use an ATM card or electronic transfer to access your cash.

If you've got a bigger stash of cash and you want to be able to access it easily, a money market account may be the way to go. You typically earn a higher interest rate with a money market account compared with a savings account. But you may need to stay above minimum balance requirements to avoid fees. And, just as with a savings account, the number of withdrawals per month may be limited.

To earn a potentially higher interest rate than a savings or money market account, you might park your money in a CD. But unless you keep your money in a CD for the prescribed amount of time, such as six months or 60 months, you may face a financial penalty that could erase the interest you've collected.

Cd Savings Calculator

Alternative Places to Grow Your Money

When you're selecting a spot to put your money—particularly for the long term—a savings account, money market account or CD may not be the right option. Fortunately, alternatives are available, including a 401(k), an individual retirement account (IRA) and individual stocks.

401(k)

A 401(k) is an employer-sponsored retirement account. It's an ideal vehicle for retirement savings, with income tax reductions and potential contribution matches from employers being among the benefits. The most common investment choice available through a 401(k) is a mutual fund. Investors own shares of a mutual fund, which pools money from many investors to purchase stocks, bonds and short-term debt.

Individual Retirement Account (IRA)

An IRA allows you to set aside money for retirement up to a certain annual amount, and doesn't require any involvement from your employer. Depending on the type of IRA you open at a financial institution, you can build retirement savings on a tax-free or tax-deferred basis. Investment options available through an IRA include stocks, bonds, CDs and exchange-traded funds (ETFs).

Individual Stocks

Individual stocks also are in the mix of places to put your money. When you buy a share of stock, you own a slice of a company. As with any type of investment, stocks come with risks and rewards—mainly gaining or losing your money depending on the rise and fall of stock prices.

The Bottom Line

You enjoy a wealth of options for saving your money, including savings accounts, money market accounts and CDs. When you weigh those three alternatives, keep in mind whether you'd need immediate access to your cash, how much interest you'll earn and what fees or penalties are involved. At the same time, take into account whether you need to create an emergency fund, pay off high-interest credit card debt or take care of other financial needs.

The Certificate of Deposit (CD) Calculator can help determine accumulated interest earnings on CDs over time. Included are considerations for tax and inflation for more accurate results.

Cd Savings Loan

What is a Certificate of Deposit?

A certificate of deposit is an agreement to deposit money for a fixed period that will pay interest. Common term lengths range from three months to five years. The lengthier the term, the higher the exposure to interest rate risk. Generally, the larger the initial deposit, or the longer the investment period, the higher the interest rate. As a type of investment, CDs fall on the low-risk, low-return end of the spectrum. Historically, interest rates of CDs tend to be higher than rates of savings accounts and money markets, but lower than the historical average return rate of equities. There are also different types of CDs with varying rates of interest, or rates linked to indexes of various kinds, but the calculator can only do calculations based on fixed rate CDs.

The gains from CDs are taxable as income in the US unless they are in accounts that are tax-deferred or tax-free, such as an IRA or Roth IRA. For more information about or to do calculations involving a traditional IRA or Roth IRA, please visit the IRA Calculator or Roth IRA Calculator.

CDs are called 'certificates of deposit' because before electronic transfers were invented, buyers of CDs were issued certificates in exchange for their deposits as a way for financial institutions to keep track of buyers of their CDs. Receiving actual certificates for making deposits is no longer practiced today, as transactions are done electronically.

FDIC-Backed

One of the defining characteristics of CDs in the US is that they are protected by the Federal Deposit Insurance Corporation (FDIC). CDs that originate from FDIC-insured banks are insured for up to $250,000, meaning that if banks fail, up to $250,000 of each depositors' funds is guaranteed to be safe. Anyone who wishes to deposit more than the $250,000 limit and wants all of it to be FDIC-insured can simply buy CDs from other FDIC-insured banks. Due to this insurance, there are few lower risk investments. Similarly, credit unions are covered by insurance from the National Credit Union Administration (NCUA insurance), which provides essentially the same insurance coverage on deposits as the FDIC.

Where and How to Purchase CDs

CDs are typically offered by many financial institutions (including the largest banks) as fixed income investments. Different banks offer different interest rates on CDs, so it is important to first shop around and compare maturity periods of CDs, especially their annual percentage yields (APY). This ultimately determines how much interest is received. The process of buying CDs is straightforward; an initial deposit will be required, along with the desired term. CDs tend to have various minimum deposit requirements. Brokers can also charge fees for CDs purchased through them.

'Buying' a CD is effectively lending money to the seller of the CD. Financial institutions use the funds from sold CDs to re-lend (and profit from the difference), hold in their reserves, spend for their operations, or take care of other miscellaneous expenses. Along with the federal funds rate, all of these factors play a part in determining the interest rates that each financial institution will pay on their CDs.

History of CDs

Although they weren't called CDs then, a financial concept similar to that of a modern CD was first used by European banks in the 1600s. These banks gave a receipt to account holders for the funds they deposited, which they lent to merchants. However, to ensure that account holders did not withdraw their funds while they were lent out, the banks began to pay interest for the use of their money for a designated period of time. This sort of financial transaction is essentially how a modern CD operates.

A major turning point for CDs happened in the early twentieth century after the stock market crash of 1929, which was partly due to unregulated banks that didn't have reserve requirements. In response, the FDIC was established to regulate banks and give investors (such as CD holders) assurance that the government would protect their assets up to a limit.

Historically, rates of CD yields have varied greatly. During the high-inflation years of the late 1970s and 1980s, CDs had return rates of almost 20%. On the other hand, CD rates have dropped to as low as standard savings rates during certain years. CD rates have declined since 1984, a time when they once exceeded 10% APY. In late 2007, just before the economy spiraled downward, they were at 4%. In comparison, the average one-year CD yield is around 0.4% in 2017. In the US, the Federal Reserve, which controls federal funds rate, calibrates them accordingly based on the economic climate.

How to Use CDs

CDs are effective financial instruments when it comes to protecting savings, building short term wealth, and ensuring returns without risk. With these key benefits in mind, it is possible to capitalize on CDs by using them to:

• supplement diversified portfolios to reduce total risk exposure. This can come in handy as retirees get closer to their retirement date and require a more guaranteed return to ensure they have savings in retirement to live off of.
• act as a short term (5 years or less) place to put extra money that isn't needed or isn't required until a set future date. This can come in handy when saving for a down payment for a home or car several years in the future.
• estimate future returns accurately because most CDs have fixed rates. The result of this is a useful investment for people who prefer predictability.

As the maturity date for a CD approaches, CD owners have options of what to do next. In most cases, if nothing is done, after maturity date the funds will likely be reinvested into another similar CD. If not, it is possible for buyers to notify the sellers to transfer the funds into a checking or savings account, or reinvest into a different CD.

Withdrawing from a CD

Funds that are invested in CDs are meant to be tied up for the life of the certificate, and any early withdrawals are normally subject to a penalty (except liquid CDs). The severity of the penalty depends on the length of the CD and the issuing institution. As an aside, in certain rising interest rate environments, it can be financially beneficial to pay the early withdrawal penalty in order to reinvest the proceeds into new higher yielding CDs.

CD Ladder

While longer-term CDs offer higher returns, an obvious drawback to them is that the funds are locked up for longer. A CD ladder is a common strategy employed by investors that attempts to circumvent this drawback by using multiple CDs. Instead of renewing just one CD with a specific amount, the CD is split up into multiple amounts for multiple CDs in a set up that allows them to mature at staggered intervals. For example, instead of investing all funds into a 3-year CD, the funds are used to invest in 3 different CDs at the same time with terms of 1, 2, and 3 years. As one matures, making principal and earnings available, proceeds can be optionally reinvested into a new CD or withdrawal. CD laddering can be beneficial when more flexibility is required, by giving a person access to previously-invested funds at more frequent intervals, or the ability to purchase new CDs at higher rates if interest rates go up.

APY vs APR

It is important to make the distinction between annual percentage yield (APY) and annual percentage rate (APR). Banks tend to use APR for debt-related accounts such as mortgages, credit cards, and car loans, whereas APY is often related to interest-accruing accounts such as CDs and money market investments. APY denotes the amount of interest earned with compound interest accounted for in an entire year, while APR is the annualized representation of monthly interest rate. APY is typically the more accurate representation of effective net gains or losses, and CDs are often advertised in APY rates.

Compounding Frequency

The calculator contains options for different compounding frequencies. As a rule of thumb, the more frequently compounding occurs, the greater the return. To understand the differences between compounding frequencies or to do calculations involving them, please use our Compound Interest Calculator.

Types of CDs

• Traditional CD—Investors receive fixed interest rates over a specified period of time. Money can only be withdrawn without penalty after maturity, and there are also options to roll earnings over for more terms. Traditional CDs that require initial deposits of $100,000 or more are often referred to as 'jumbo' CDs, and usually have higher interest rates.
• Bump-Up CD—Investors are allowed to 'bump up' preexisting interest rates on CDs to match higher current market rates. Bump-up CDs offer the best returns for investors who hold them while interest rates increase. Compared to traditional CDs, these generally receive lower rates.
• Liquid CD—Investors can withdraw from liquid CDs without penalties, but they require maintaining a minimum balance. Interest rates are relatively lower than other types of CDs, but for the most part, still higher than savings accounts or money market investments.
• Zero-Coupon CD—Similar to zero-coupon bonds, these CDs contain no interest payments. Rather, they are reinvested in order to earn more interest. Zero-coupon CDs are bought at fractions of their par values (face value, or amount received at maturity), and generally have longer terms compared to traditional CDs, which can expose investors to considerable risk.
• Callable CD—Issuers that sell callable CDs can possibly recall them from their investors after call-protection periods expire and before they mature, resulting in the return of the initial deposit and any subsequent interest earnings. To make up for this, sellers offer higher rates for these CDs than other types.
• Brokered CD—These are different in that they are sold in brokerage accounts, and not through financial institutions such as banks or credit unions. An advantage to brokered CDs is that there is exposure to a wide variety of CDs instead of just the CDs offered by individual banks.

Alternatives to CDs

• Paying Off Debt—Especially for high-interest debt, paying off existing debt is a great alternative to CDs because it is essentially a guaranteed rate of return, compared to any further investment. Comparatively, even the interest rate of a low rate loan, such as home mortgage, is normally higher than CDs, making it financially rewarding to payoff loan than to collect interest from CD.
• Money Market Accounts—Investors who like the security of a CD and are okay with slightly lower returns can consider money market accounts, which are certain types of FDIC-insured savings accounts that have restrictions such as limits on how funds can be withdrawn. They are generally offered by banks.
• Bonds—Similar to CDs, bonds are relatively low risk financial instruments. Bonds are sold by government (municipal, state, or federal) or corporate entities.
• Peer-to-Peer Lending—Peer-to-peer (P2P) lending is a fairly new form of lending that arose from advances in internet technology that enables lenders and borrowers to link up on an online platform. Peer borrowers request loans through the platform, and lenders can fund the loans they find desirable. Each P2P lending service will come with rules in order to regulate cases of default.
• Bundled Mortgages—Commonly available through mutual funds, bundled mortgages are securities that are traded in a similar manner as bonds, but generally yield more than Treasury securities. Although they received a lot of negative publicity for the role they played in the 2008 financial crisis, mortgage securities have bounced back through more stringent regulations. Bundled mortgages are backed by the Government National Mortgage Association (Ginnie Mae).