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What is a Certificate of Deposit

Certificate of Deposit

A way of earning interest on the money you are saving by locking it away for a certain period of time

Called Certificate of Deposit because banks give you a certificate stating

  • Amount you deposited
  • Interest rate
  • How long the money must remain in account

CDs keep you money safe while earning interest

However, if you try to take money out, there will be penalties

 

How Do CDs Work?

  1. Buy a CD at a certain price
  2. Interest will compound (grow) annually
  3. CD will earn money for just sitting there
  4. At the end, the CD will mature. You’ll receive your original amount + Interest

 

So if you purchase a

  • $10,000 CD
  • 4% interest rate
  • 1 year term

After a year, you’ll receive

  • $10,400
    ($10,000 x 1.04) = $10,400

 

Pros

  • Considered very safe
  • Fixed or variable interest rates
  • Easy to open

Cons

  • Low liquidity
  • Low interest rates

 

 

Should I Invest In a CD?

  • Can you set money aside & not touch it?
  • Do you need portfolio stability?
  • Do you already have emergency funds?
  • Can you handle loss on inflation?

If you answered “yes” to all of these questions

You are ready to start investing in CDs!

 

Added Bonus

In the United States, unlike in other countries, deposits are protected by the FDIC (Federal Deposit Insurance Corporation)

 

Good luck


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