What is a Certificate of Deposit?

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Once upon a time, when you set up your certificate of deposit (CD) account you received an actual sheaf of paper to stand for the money you’d invested. That’s where the actual name for this type of savings account comes from. These days, it’s highly unlikely that you’ll receive more than a reference number or confirmation e-mail to signify that you’ve established a CD account; but instead, the name stands for so much more. It represents what many consider to be an extremely safe, low-risk investment procedure.

The first thing you need to know about a certificate of deposit is that it requires you to have a sum of money stored away that you don’t intend to touch for awhile. How long? Well, that’s up to you and the financial institution you’re working with. Your CD term can be anywhere from six months to five years – or more. For example, the Discover Bank certificate of deposit intervals range from three months to ten years. Whatever that total is, it means you cannot – without surrendering a large penalty fee – touch your own money again until the period has concluded.

The longer that you put your money away, the more it’s going to earn. Using Discover Bank’s rates as of April 2011, a five-year rate of 2.35% means your $ 10,000 becomes $ 11,232. And you don’t have to do anything but wait – it’s that easy. The same amount invested at the same institution for ten years becomes $ 13,439. Of course, some variables and limitations do apply, so be sure to speak to someone you trust who can answer all of your questions and point out all of the smaller details when you’re setting up your CD.

These numbers are not guesswork. Before you sign the final dotted line to get your certificate of deposit started, your broker should be able to tell you exactly how much you’re going to withdraw when your money reaches maturation. In other words, given the amount and the length of investment, you’ll know exactly what you’re going to bet back – including interest. And this agreement is federally protected, so you don’t have to worry about the economy ruining your chances of getting back the total you’re owed.

The other thing that you should consider before you even get started is your renewal plan. You can agree to an automatic renewal when the term is up. This doesn’t mean that you won’t be reminded or notified, but it does mean that you don’t need to reply in order for the financial institution with which you’re doing business to keep your money for another fixed amount of years (you can, however, choose to opt out during a certain window of time). The benefit here is that you can usually keep the same rate that’s in place, no matter what rate the bank or financial institution is current offering to new, exactly identical accounts. If you originally secure a great rate, this can be very advantageous.

 

T.M. Murphy is a professional writer who lives in NYC. She specializes in fashion, beauty, marketing and finance articles. For easy-to-understand financial and banking advice to use on topics such as the Discover Bank certificate of deposit, she turns to http://www.discoverbank.com. T.M. Murphy has been writing full-time since 2006, when she graduated with a B.A. in English from Northeastern University.