How Do CDs Work?

12/5/2023 12:00:00 PM

Person putting coins in a piggy bank

What are certificates of deposit, and how could they help grow your savings?

You work hard for your money, but is your money working for you?

Your answer will depend on where you keep your cash. If you have it stored mainly in a checking account, for example, you could instead consider putting it into a certificate of deposit (CD). With higher interest than a checking account, plus guaranteed earnings and low risk, CDs can be a useful addition to any financial plan.

How do CDs work?

When you open a CD, you agree to have your funds “locked” in an account for a set period of time, which could be anything from three months to over a year. In exchange, because your bank knows it will have your funds for that time period, it will pay you a fixed interest rate that’s typically higher than what you’d find with other savings products.

For example, let’s say you deposit $10,000 in a 12-month CD with a 4.00% annual percentage yield (APY). At the end of your term, you’d have accrued $400 in interest.

Once the term is up, you can then:

  • Withdraw your funds plus the interest you’ve earned;
  • Reinvest it in a new CD; or
  • Do nothing, and your CD may automatically renew at the closest term and interest rate.

What are the benefits of CDs?

There are several factors that make CDs worth considering, including:

  • Peace of mind: CDs won’t be affected by market turbulence or volatility in the same way as stocks, bonds or mutual funds, and your money will be insured by the FDIC like with other types of savings accounts. (Subject to FDIC insurance limits)
  • Guaranteed income: You’ll receive the set interest rate that you’ve agreed to.
  • Predictability: When you deposit your money into a CD, you know what you’re getting. You can set it and forget it, and you know how much you can expect when the term ends.

What’s the difference between fixed and flexible CDs?

There are two main CDs options available, and knowing how they compare can help you pick the one that best fits your situation.

  • Fixed-Rate CDs: Most banks’ standard option, fixed CDs lock in your money and your interest rate for a set period of time. Once that period of time is complete you can either withdraw the entire amount or roll it over into another CD.
  • Flexible CDs: Also called flex CDs, these options typically offer the ability to upgrade your rate once per term if the rate goes up, and to withdraw a portion of the funds in your account once per term without a penalty.

Contact Bell Bank to open a CD

If you have cash that’s not earning interest, or if you’re looking to open an account that you know won’t be needed for a while (like for a child or grandchild), then a CD could be a great option for you. Contact Bell Bank at 800-450-8949 to get started. We have competitive rates and options for every situation, and can help you grow your savings.

Lynn Johnson headshot

Lynn Johnson

EVP/Retail Banking