Financial Definitions: What's a CD?

For a lot of people, the term certificate of deposit, or CD, brings up a birthday gift you received as a kid from your grandparent that you didn't totally understand. As adults, however, a CD can be a valuable tool in your investing arsenal. We want to walk you through what it means to open a certificate of deposit, and why you should consider this sound investment type.

A certificate of deposit is essentially an arrangement between you and your financial institution where you promise not to withdraw any of your deposit for a specific time period, and in return, the credit union will pay you a higher rate of interest on the money you used to fund the account. There are both advantages and disadvantages to opening a CD.

Advantages of Certificates of Deposit

The beauty of a CD is that it's the best of both worlds when it comes to investing: you have the safety and stability of a savings account with a higher interest rate. The money is insured (by the FDIC for a bank and NCUA for a credit union), there are a wide selection of terms and maturities to choose from, and the return is fixed and predictable. Plus, at the end of your term, you can decide to renew, or move you money to a new account.

Disadvantages of Certificates of Deposit

Unfortunately, if your money is deposited into a CD account, it's not readily available to cover emergencies or unexpected purchases. If you do try to take your money out prior to the end of the term, you're likely to accrue fees. And while there is safety in a fixed interest rate, it may be lower than the rate of inflation. This could mean your rate of return loses its purchasing power over time.

Usually, the benefits of a CD outweigh the shortcomings when it comes to long-term investing, and opening a certificate of deposit account can be a great way to reliably increase your savings. If you're interested in Florida Credit Union's current CD rates, click here to learn more.