The Basics of a CD Savings Account

Posted on July 28, 2009 in Business/Law

A CD savings account is a middle ground account between short and long term, high and low interest. CD represents a Certificate of Deposit, and in its most basic form it is a loan you are making to the bank or financial institution in exchange for being paid interest on your investment. Therefore, you can know exactly how much money you will gain at the end of your investment when you collect your return.

For example, if you were to open a CD for $1000 for 6 months at 5% interest, you know that at the end of that time you will collect $1050 total. Within those six months the bank or financial institution will use your $1000 as collateral, expenditure, other loans, and other means as it sees fit.

Unlike a Money Market savings account (which also accumulates interest), a CD cannot be touched for the length of the investment. Some institutions allow CD’s to be accessed with the payment of a penalty fee, but not all banks allow this. Therefore it is best to invest in a CD only if you are certain you can live without the amount you are investing for at least the agreed upon amount of time.

CD’s are a good choice for those on a fixed income with a small amount of savings. The amount invested in the CD is safe from inflation, since it is earning interest, and the short term of the investment makes it low risk. Many CD accounts require a minimum of $5,000 deposit and a minimum investment of 12 months, although some low interest accounts have lower requirements.