You may have heard of CDs, but do you really understand what they are or why anyone would use them? CDs can be very useful financial tools for earning higher interest on your money.

CD is an acronym for Certificate of Deposit. It’s a specific type of savings account you can use to grow your accounts with higher interest rates to collect more interest. 

They work like this: Money is deposited into the CD for a designated term. It sits in the account for the length of the term and will accrue interest regularly. The interest, listed as the APY (Annual Percentage Yield), shows you how much you can expect to earn on your deposit while the CD is open. 

Once the term is up the CD “matures” and your initial deposit PLUS all the interest you earned now becomes available. You then have the option to either close the account and put your money elsewhere, or to roll it all over into another CD with the same term or a different term. 

There are two big differences between a CD and a regular share savings account. One is that the interest you can earn from a CD is higher than the average share savings account. This means that you will accrue more interest and the value of your account will climb faster than a regular account. When you look at a CD rate table you’ll see a list of options for term length, rate and APY. You’ll also notice that the longer the term is, the higher the interest rate.

Think of it this way, the credit union offers a 12-month CD for 1.00% APY. You agree to deposit $5,000 into the account for the full year after which you will get your $5,000 back plus the 1% you earned in interest over the term. In this case you earn $50, and your total account is now valued at $5,050. Compare this to earnings from a regular savings account, where the current average is .05%, you’ll only earn $2.50 on that $5,000 after 12 months. The CD clearly gives you a better return for your money.

The other difference between a CD and regular share savings is that the money you deposit into the account is locked in and cannot be removed without paying a penalty fee. If you wanted to remove money from the CD, it would cost you. So, putting money into a CD requires a little planning and forethought, and don’t use money you may wind up needing in a pinch, like money from your emergency fund. 

There is a special type of CD out there known as a FLEX CD. These are special CDs that allow you to add money to them over the term in specific increments like $50 or $100 depending on the account. Say you opened the account for $1,000 and three months later, you wanted to add another $100. With a FLEX CD you can do that and there are no penalties or fees to do so. This cannot be done with a traditional CD.

The real benefit of opening CDs is to use them as part of your savings and investment strategy. If you have money parked in a low interest-bearing account, it may be a good idea to take some or all of it and move it to an account that will pay you more. 

If you’re seriously thinking of adding a CD to your savings strategy here’s a quick list of things to consider when you’re planning to open one:

• Rate and APY – How much interest will you earn from this CD? 
• Length of the term – How long will the money be locked in for? Will you need this money at some point soon and have to break the account? 
• Minimum deposit – How much money needs to be deposited to open the account? 
• Withdrawal penalty – How much will it cost you if you need to break the CD before it matures? 
• If it’s a FLEX – Can you add more money to this account over the life of its term?
• The economic climate – Are rates going up or down? Is this the right time to lock in a good rate? 
• Make sure it’s insured – Does the financial institution tell you it’s insured by the NCUA or FDIC?
• The interest earned is taxable – What’s the best way to plan for the added income when filing taxes?

At Triangle, we have a bunch of CD accounts including a Kids Club FLEX account at competitive rates. If you’re looking for a place to earn a little more interest in money you don’t need for a while, check out the rates and terms on our website.

CDs can be a great, safe choice to earn higher interest on your money. With the right strategy and planning, you can use them to build your wealth.