I find a lot of truth in the saying, “Everything old is new again.” Isn’t it interesting how things can become outdated, and then after some time get a new lease on life? I recently went shopping with my daughter and had to smile at the outfits she was excitedly pointing out as so fashionable. I was thinking, “I’ve owned that combination before. I remember that style. That was cool when I was a teen.”
Then my son came home from helping a neighbor clean their garage and was excited to have been rewarded with a box of old records.
Thinking about these things that were great in their day and are becoming valuable again got me thinking about CDs. No, not compact disc CDs — although they might eventually make a comeback, too! — but CD as in certificate of deposit.
This financial savings tool may be largely unknown to those who reached adulthood in the past decade when rates have been consistently low. Now that we’re in an environment where rates have been going up, it’s a good time to become familiar with certificates of deposit (CDs) and learn how they can be a helpful tool to both save and earn.
Get to Know How CDs Work
A certificate of deposit is a timed deposit account. You pledge to keep a set amount of money in the account for a set period of time, and for putting those funds in the bank, the bank provides a higher interest rate.
Traditional CDs are a set-it-and-forget-it type of account. How easy is that? Once you have opened it and funded it, you can neither add to it nor take from it until the maturity date. That being said, if you need money from it sooner, you can make a withdrawal, but there will be a penalty fee.
When considering setting up a CD, there are two key pieces to think about: the term and the rate.
Get to Know CD Terms
The length of a CD is known as a term, and financial institutions have a number of terms they offer, ranging from one month to multiple years. You can see Bank of Utah’s available CD terms here.
Consider your savings goals:
What are you saving for?
How much will you need?
How quickly will you need access to your funds?
Defining these will help you consider what term will make the most sense for you.
There really are many term options. Keep in mind that rates are different for each term, so once you know a ballpark for your goals, you’ll want to look at rates to finalize the term that’s best for you.
Get to Know CD Interest
Because financial institutions know they can trust these funds to stay in the account for the determined period of time, they’ll generally pay higher interest rates on CDs compared to savings accounts.
There are two rates to know when it comes to CDs — the interest rate and annual percentage yield (APY). Interest paid on a CD will compound. That means the interest is added to your principal periodically, over the length of your CD. Then that new total earns interest. So, over time, you’ll get paid for all of the money in the account, not just the money you invest. Even the interest earns interest!
The interest rate reflects the percentage you’ll earn on your principal investment. The APY shows what you’ll earn in a year if you leave the CD to reach full maturity and all compounding interest is realized.
In high interest rate environments, it also isn’t uncommon for financial institutions to offer specials on certain CD terms. These will vary by institution, but are great opportunities, so keep watch for them. You can learn about Bank of Utah’s best CD rate here.
Get to Know Why CDs are Great
CDs are great because they are an investment strategy you can count on. Stock values may rise and fall, but a CD interest rate is locked in. Your earnings are guaranteed as long as you let the CD reach its maturity date.
CDs also provide a great way to manage your savings goals. If you are saving for something in the future, and you already have a good chunk of money saved for it, putting that in a CD removes any temptation of pulling those funds elsewhere. We’ve all had the experience of saving for a goal, but then something else comes up, and our goal savings decreases. A CD makes sure your money allocated for that goal only grows.
And this is a great time for CDs. CDs weren’t terribly exciting to consider when interest rates were low and pretty flat over the past decade. With rates rising, though, CDs are ready to go from being old to being new again. In what can feel like challenging financial times, having a savings tool that both protects and grows investments is worthy of a fresh take. If you'd like to learn how to fit CDs into your savings plan, please reach out.
Mary McBride is Vice President of Digital Experience and Sales at Bank of Utah. She loves finding ways to ensure the Bank’s digital channels give customers the information, tools and resources they need. Mary is a mother of two who loves exploring the trails in our great state with her husband and kids.