What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a savings product offered by banks and credit unions that provides a fixed interest rate over a specified term, which can range from a few months to several years. This means that when you open a CD, you agree to leave your money in the account for the duration of the term in exchange for a guaranteed return on your investment. The interest is typically higher compared to regular savings accounts, reflecting the commitment to keep the money untouched until the maturity date.

This feature of fixed interest over a designated period distinguishes CDs from other savings products. For instance, a standard savings account may have a variable interest rate that fluctuates based on market conditions, which does not provide the same level of certainty in terms of earnings.

In contrast, while a short-term loan represents borrowing money, a CD is a product for saving. Similarly, characterizing a CD as an investment that comes with high risk is inaccurate; CDs are generally considered safe, low-risk financial instruments. Understanding these characteristics helps to appreciate the role of a CD in personal finance, particularly in saving and investing strategies.