6 Benefits of Certificate of Deposits (CDs)

by Raptor Staff on December 27 2022

A certificate of deposit or CD is a type of time deposit account. It may be offered by a bank, credit union, or online financial institution. Funds in the account are locked in for a specific amount of time while earning interest. While there are many benefits of certificate of deposits, the biggest benefit is the opportunity to earn a higher rate of interest. 

How A Certificate Of Deposit Works

The first thing you’ll need to do is open a Certificate of Deposit account at your chosen bank or credit union. The process is similar to that of opening a savings account. To open an account, the bank will ask you to make a minimum initial deposit. The minimum opening deposit may vary among banks so make sure to find out first. 

When opening a CD account, the bank will also require you to choose a CD term. This is the length of time that you’d like to keep your money in the account. You must choose this term carefully as your money will be tied up for that length of time. CD terms can be short, starting at around 30 days, and can extend up to 10 years or even more. Not all banks offer this wide range of CD terms so make sure to ask about your options if you have something specific in mind. 

On maturity, you can withdraw all the funds in the CD account. This includes the money you deposited initially along with the interest earned. 

Difference Between CD Account And Savings Account

You can use a certificate of deposit account as a way to save and grow your money. However, you should know that it is not the same as a savings account. There are some similarities between the two types of accounts but there are also a few major differences. 

CD accounts and savings accounts are similar in that your money will earn interest in both types of accounts. The big difference is that you can make about 6 withdrawals a month from your savings account balance. On the other hand, you cannot withdraw money from your CD account. The funds in a certificate of deposit account are tied up until the end of the term. You can only access those funds after the CD maturity date. Banks will charge you a penalty for early withdrawals. 

Benefits Of Certificate Of Deposits 

Certificate of deposit offers several benefits that make them an appealing option for managing your savings goals. Here’s a look at some of the major benefits of certificate of deposits. 

1. Your money is safe in a CD account

Certificate of deposit accounts is among the safest places to keep your money along with savings accounts. When you deposit funds into a CD account, that money is insured and will earn guaranteed interest. There are no risks involved and you don’t have to worry about stock market trends either. Your money will keep growing steadily regardless of whether stock prices are rising or dropping. 

2. Your money will earn a higher interest rate

Certificates of deposits offer higher interest rates as compared to savings or money market accounts. The reason for this is simple. The funds in your CD account are tied up for a set time period. This allows the bank to use it for bigger investments. In return, they give you a higher rate of interest. With a savings account, you can withdraw the funds as and when you need them. This limits the ways that the bank can use those funds, hence the lower interest rate. 

3. The returns are guaranteed

When you open a certificate of deposit account, the bank will quote an interest rate. This rate stays fixed for the full term of your CD, regardless of what the market does. Even if markets drop, your money will keep growing at the rate of interest that was set when you opened the account. 

One benefit of a certificate of deposit is that the fixed interest rate makes it easy to determine how much you’ll earn over time. This allows you to set long-term financial goals. For example, if you’re planning on buying a house in two years you can choose a 2-year CD term. Now you’ll know exactly how much money you’ll have at the end of the term to put toward your home purchase. 

4. There are no monthly maintenance fees

Most banks don’t charge any maintenance fees on certificates of deposit. The few banks that do, charge very nominal fees. This is a great benefit of a certificate of deposit. No monthly maintenance fees mean you don’t have to worry about your interest getting impacted. At the end of the term, you’ll be able to withdraw the full amount without any deductions. 

This is unlike savings accounts and money market accounts. Almost all banks charge a monthly maintenance fee on both these types of accounts. This fee can make a significant dent in the interest earned on your money. 

5. CDs come with different terms and maturity dates

When you open a CD account, the bank will let you choose from a wide range of terms and maturity dates. This is great news as it means you’re not stuck with a term that’s too long or too short for your purpose. Instead, you can choose a term and maturity date that fits well within your financial goals. 

For example, let’s say you’re saving for your child’s college tuition. You know which year they’ll be applying to college and when you’ll need those funds. You can now put your funds in a CD and choose a maturity date that allows you access to the money in time to pay the college tuition. This gives you the benefit of earning higher interest on your money right up till the time you need it. Additionally, you’re guaranteed to get that money on the maturity date. With a CD, there’s no stress about whether you’ll be able to access the money or how much you’ll get. 

6. You can use CD laddering to meet multiple goals

Laddering is a unique benefit of certificate of deposit. With this strategy, you open multiple CD accounts with different maturity dates. The interest rate on each account will depend on the term of the account. Longer account terms will earn a higher interest rate. Shorter terms will earn lower interest. 

The benefit of laddering is that you can tailor each account to meet a specific goal. You’ll have CDs that are continuously maturing on different dates. This allows you to get access to your funds for different purposes. 

A short-term goal may be a vacation. Although a shorter CD term has a lower interest rate, it’s still better than leaving that money in a savings account. By the time your vacation date draws near, you’ll have earned some extra spending money. 

A long-term goal may be a home purchase. Putting your money in certificate of deposit with a longer term will earn higher interest. In this case, the savings will be more than just the interest earned. The interest on your CD will help lower your home mortgage, which can result in huge savings in over the mortgage term. 

There’s another huge benefit of certificate of deposit laddering. If you don’t need the funds when your CD matures, you can open a new CD with a new term and new interest rate. This allows you to keep your funds fluid and easily accessible without losing out on any benefits. This way, CD laddering allows you to support multiple goals while still earning interest on your money. 

Should You Open A Certificate Of Deposit? 

There are several benefits of certificate of deposits. However, you should be aware of its potential downsides to making an informed decision. 

One of the downsides of a CD is that you won’t be able to access the funds until the account matures. That means you can’t depend on your CD for access to emergency funds. It’s only good for helping your money grow. You must make sure you have some other emergency funds before using the money to open a CD. If you withdraw the money before the maturity date, you’ll pay a penalty which will eat into any interest earned.  

How to Open a Certificate of Deposit

The process of opening a certificate of deposit is straightforward. The most important thing is to do your research and compare the terms and interest rates offered by different banks. This will help you choose a certificate of deposit that’s most beneficial to you. 

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.