A certificate of deposit (CD) is a savings product where you deposit money for a fixed term at a fixed interest rate. In exchange for leaving the money untouched until maturity, you usually earn a higher rate than a regular savings account, but early withdrawal typically incurs a penalty.
You choose a term, commonly from a few months to several years, and lock in an interest rate. The bank pays interest over the term, and at maturity you get your principal back plus interest. Withdrawing early usually forfeits some interest as a penalty.
A savings account lets you withdraw anytime at a variable rate. A CD fixes both the rate and the term, so it protects you if rates fall but locks you out of higher rates if they rise before maturity.
A CD ladder splits money across several CDs with staggered maturities. As each shorter CD matures you reinvest it into a new longer one, which balances access to cash with the higher rates of longer terms.
Home · By Runze