Financial Education Resources

As a financial literacy specialist, I know that saving money can be challenging for many people. However, the key to becoming a consistent saver is simply to get started. In my previous blog, I discussed strategies for saving effortlessly by becoming a “lazy saver”. Overthinking your savings strategy can create unnecessary pressure, leaving you feeling stuck. But by rethinking how and where you save, you can reduce some of that stress. Utilizing the variety of savings options offered by FDIC-insured financial institutions, like Fidelity Bank, allows you to take control of your financial future and prepare for what's ahead. In this post, I will explore Certificates of Deposit (CDs): what they are, how they work, and whether they are the right savings tool for you.

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a financial product offered by banks and credit unions that holds your money for a fixed period in exchange for interest. The duration of the CD, known as the term, can range from a few months to several years. Once the CD matures, you can either withdraw your money with interest or reinvest it in a new CD. CDs are considered one of the safest ways to grow your savings because they are backed by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor.

The interest rates on CDs are generally higher than traditional savings accounts. To open a CD account, the required minimum deposit is typically around $1,000, though it can vary by financial institution. Learn More Here.

How Does a CD Work?

When you open a CD account at a bank or credit union, you choose the term length and interest rate that suits your goals. The Annual Percentage Yield (APY) is how much interest your CD will earn over one year, considering compounding. Keep in mind that the APY can differ from the advertised interest rate.

CDs offer higher interest rates than many traditional savings accounts, and the longer the term, the better the potential returns. Whether you choose a short, medium, or long-term CD, you lock in an interest rate for the term. This can be particularly advantageous in periods of fluctuating market rates.

At Fidelity Bank, our minimum deposit to open a CD is $1,000, which aligns perfectly with the lazy saving techniques I discussed earlier. Once you’ve saved your first $1,000, you can start enjoying the benefits of higher returns with CD savings.

Things to Consider Before Opening a CD

Before opening a Certificate of Deposit, it's important to have a clear understanding of your financial goals. Are you saving for a vacation, a new car, or a down payment on a home? Your savings goal will help determine the ideal term for your CD.

Here are some key things to consider:

• Term Length: Choose a shorter-term CD for short-term goals or a longer-term CD for long-term objectives like retirement.
• APY: Be sure to ask about the annual percentage yield (APY) and how often the interest is paid (monthly, quarterly, or annually).
• Access to Funds: A key feature of a CD is that your money is "locked in" for the duration of the term. Withdrawing funds before maturity could result in penalties or a loss of interest. Always ask your bank representative about penalties and any other fees before committing.
• Interest Rate Trends: If market interest rates are expected to decline, a fixed-rate CD can lock in a higher rate for the duration of your term, which could be beneficial in the long run.

Why Should You Invest in a CD?

If you find it difficult to keep money in a traditional savings account, a Certificate of Deposit can help you develop disciplined saving habits. Because access to funds is limited during the term, it encourages you to resist the temptation of impulsive withdrawals.

However, if an emergency arises and you need to access your money early, most institutions allow you to close the CD early, although you may face a penalty or lose some interest. For those who struggle with traditional savings accounts, a short-term CD can be a great way to start saving with more controlled access to your funds.

Pros and Cons of Opening a CD

Pros:

• Higher interest rates compared to traditional savings accounts.
• Encourages disciplined savings by limiting access to funds.
• FDIC insured, meaning your money is protected up to $250,000.
• Offers predictable returns since the interest rate is fixed.
• Low-risk investment option for individuals who want safe growth.

Cons:

• Limited access to funds during the CD’s term.
• Early withdrawals typically result in penalties or a loss of interest.
• Higher minimum deposit requirements than regular savings accounts.

Is a CD the Right Choice for You?

Ultimately, whether a Certificate of Deposit is the right savings tool for you depends on your personal financial situation. For many, it is an excellent way to build wealth safely and consistently. Consider the pros and cons of CDs in relation to your financial goals, and you'll be able to make an informed decision about whether this product fits into your savings strategy.

At Fidelity Bank, we're committed to providing a variety of savings products that meet your needs. If you have any questions about Certificates of Deposit or would like assistance in creating a savings plan, don’t hesitate to contact us!