Certificate of Deposit (CD)
A certificate of deposit (CD) is a savings product offered by banks that pays a fixed interest rate in exchange for locking up your money for a set term — typically 3 months to 5 years. CDs are FDIC-insured up to $250,000 and currently offer higher rates than regular savings accounts.
$10,000 in a 1-year CD at 5.0% → $10,500 at maturity. Same money in a 30-year stock portfolio would grow to ~$76,000 at 7%/year.
CD rates are typically higher than high-yield savings accounts for the same amount because you agree not to withdraw the funds until maturity. Withdrawing early triggers a penalty (usually 90–180 days of interest) — though "no-penalty CDs" exist at slightly lower rates.
A CD ladder spreads deposits across multiple maturities (e.g., 6 months, 1 year, 18 months, 2 years). As each CD matures, you reinvest at the current rate. This approach maintains liquidity (a CD matures every few months) while capturing higher rates on longer terms.
CDs are ideal for money you know you won't need for a specific period — emergency fund overflow, a house down payment in 12–24 months, or a known future expense. They are not suitable for long-term wealth building, where equity exposure produces significantly higher returns over time.
Related terms
- Emergency Fund
- An emergency fund is a savings buffer covering 3–6 months of essential living expenses, held in liquid, low-risk accounts. It protects against job loss, medical emergencies, and unexpected large expenses.
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Bond
- A bond is a fixed-income debt security in which an investor loans money to a government or corporation for a defined period at a fixed interest rate. Bonds are generally less volatile than stocks but provide lower long-term returns.