Why would I open a CD (Certificate of Deposit)?

Why would I open a CD?

The most common reason you would open a Certificate of Deposit (CD) account is to grow your money faster.

Typically, a CD is a better option for growing money more quickly than a classic savings account but is only an advisable option if you do not need to use the money within the allotted “locked” time of the account's terms.

How does it work?

A Certificate of Deposit is a type of savings account that holds a lump sum of money for a "locked” period, such as six months, one year, or five years, in return for interest paid to you at a set rate (called “annual percentage yield” or “APY” for short). APY represents the amount of interest (expressed as a percentage) an account would earn over a year and takes into account the frequency of compounding. This type of account can be a safer and more conservative investment vehicle than stocks and bonds.

Let’s look at how it would work in an entirely hypothetical situation (the numbers used do not reflect actual rates nor do they guarantee them): James has $10,000 he received from an inheritance. He has no immediate need for the money, but he will in about a year. James decides to open a CD at 3% APY for a one-year term. James will earn a little over $300 in interest. That means at the end of his 1-year term he will have a total of $10,300 ($10,000 initial deposit + $300 interest). This is a smart move for James because he earned the $300 passively just by having the money sit in the account.

If James were to keep the $10,000 in a typical savings account (with a .40% APY, for example), he would only earn a little over $40 (which is $260 less than if he had put the money in a CD).

When it comes to return on investment, a CD is typically in between a classic savings account and stocks. James would potentially earn more than he would in a savings account, and less than he would in a long-term stock investment. However, a CD may earn more than a stock investment in a shorter amount of time, depending on James’ investment mix. Stocks typically earn the most money over extended periods of time. If you know you want to grow your money for an intermediate term and don’t want to risk the volatility of the stock market, a CD is a good move for most people.

You can begin to estimate how much interest you might earn before opening an account with our Fixed Rate Savings Calculator.

Things to Consider

Here are some questions you should ask when considering opening a Certificate of Deposit account:

1. When do I need access to my funds? CDs have a “lock in” period with penalties for early withdrawals. This means you cannot access the funds until the end of the set term without losing the interest earned to date. It’s advisable to keep some money in a classic savings account you can quickly access if an emergency happens (like a car breakdown). In other words, it’s smart not to invest all your savings in a CD – keep some in an account where you can easily withdraw funds as needed without penalty.
2. Do I have enough money to open an account? There’s usually a larger minimum balance to open a CD than most savings accounts.
3. What CD term length should I choose? Typically, longer CD lengths equal better annual percentage yields (but not always). Check your banks APY terms to determine what length is best for you.
4. Am I able to add more funds to my CD? You cannot add funds to your CD until it is available for renewal.
5. What options do I have when my CD matures? At the end of your CD term, you get the option of either renewing a CD (at the same or different terms) or moving your money elsewhere. At Southside, you will be mailed a maturity notice in advance of your CD renewing. At that time, you can choose whether to renew, change terms, or cash in your CD without losing any interest accrued.

How do I open one?

Opening an account is simple! Just visit https://www.southside.com/open-a-cd-online to open one online or find one of our branches by visiting southside.com/locations.

The information provided in this article is for general informational purposes only and should not be construed as financial advice. Before making any financial decisions, it is strongly recommended that you consult with a certified financial planner™, attorney, accountant, or another trusted financial professional to assess your individual circumstances.