Investing in a certificate of deposit is an effective way to save a large sum of money for use in the future. A certificate of deposit account can help you fund a new home or vehicle purchase, or help put your kid through college when it comes time. Here are a few things you should know before opening a new certificate of deposit account:
Most certificate of deposit accounts can't be withdrawn from at any time. When you open a CD account, you'll agree to leave the money you deposit in the account until it matures at a later date. Your financial institution will likely offer you a variety of term options that could last anywhere from 6 months to a few years. So if your CD account is scheduled to mature a year after it is opened, you probably won't be able to withdraw any money from the account until that time.
But your bank may offer add-on services that will allow you to withdraw a certain amount of money periodically without penalty. So talk to your service provider about what all of your withdrawal options are before opening a CD account so you'll know exactly when you can and can't access your funds while the account is active.
Interest Accrual and Payouts
Certificate of deposit accounts tend to accrue interest differently than traditional savings accounts do. Because you'll be agreeing to keep your deposited funds in your CD account until it matures on a pre-specified date, your financial institution will likely reward you with higher interest CD rates, which means you can expect to make more on your saved money than you would if you were to put it straight into a savings account.
And depending on the type of financial institution you're working with, you may receive your interest payments on a monthly or quarterly basis, or the interest may be added to your CD account for access at a later date. Ask your bank for a copy of their interest terms in writing so you know what to expect as your certificate of deposit ages.
Ongoing Account Renewal Options
It's also a good idea to find out whether you'll be able to renew your certificate of deposit account after it matures or if you will have to open a brand new CD account every time you want to deposit money after withdrawing from a matured account. Some banks will allow you to automatically renew your CD account after it matures by simply depositing more money in to it.
Or they may allow you to extend the life of your certificate of deposit account so you have more time to save up before withdrawing from it. Your service provider can help you compare their renewal options side-by-side to determine which option would best fit your specific needs and future expectations.