Bank of Dudley

Certificates of deposit (CDs) are a secure, high-yield savings option that banks offer as time deposits. Unlike checking or savings accounts, CDs require funds to remain untouched for a fixed term, rewarding account holders with significantly higher interest rates. They are FDIC-insured, making them a safe investment compared to stocks or other volatile assets. CDs also offer flexibility through options like laddering, which balances accessibility with long-term growth. At Bank of Dudley, our local experts can help you navigate the best CD options to grow your savings securely and efficiently.

Recently, we discussed the differences between two common tools bank customers use to set aside money: the savings account and the money market account. As you might expect, though, those two products aren’t the only savings and investment options offered by most banks. There are dozens of other ways banks can help their customers grow their wealth and improve their financial stability.

One of the most popular is the certificate of deposit (CD), a time deposit that offers much higher yields than a savings or money market account. In exchange for that higher yield, CD customers agree to leave their money in the certificate account for a fixed amount of time and agree to penalties for early withdrawal.

So, how do certificates of deposit work? Our banking experts tackle this and other questions as we explore this popular and low-risk investment and savings option.

Certificates of Deposit Are a “Time Deposit”

The deposits you make into your checking and savings accounts are “call deposits,” meaning you can “call” upon the bank at any time to withdraw money without any penalty*.

On the other hand, the money you deposit into a CD is considered a “time deposit” (often called a “term deposit”), meaning that withdrawals made before the account reaches maturity or the end of its term can be penalized. The term is set when the account is open and can last anywhere from a few months to several years.

Why are certificates of deposit time accounts instead of call accounts? Because the money in a CD is invested for a fixed period, the bank is more willing to pay a higher rate of interest – because it gives the bank more flexibility. When you deposit money in a bank, the bank uses that money to fund loans and other banking products that earn interest. Cash in a call account has to be readily available to the accountholder, so banks are less able to use them for interest-earning purposes.

The early withdrawal penalty of a CD, however, means that the vast majority of certificate of deposit customers will leave the money in their CD until the end of the term, freeing up the bank to use that money to earn more interest for a more extended period before the customer is likely to withdraw the funds.

*Certain accounts, notably savings and money market accounts, typically have a penalty for excessive withdrawals within a specific period. Still, all allow at least one (and most offer several) withdrawal(s) without penalty per statement period.

Certificates of Deposit Are FDIC-Insured

Just like your checking and savings accounts, the Federal Deposit Insurance Corporation (FDIC) guarantees that funds deposited in CDs at member banks are fully insured up to certain limits. So, unlike money invested in the stock market, commodities, or other securities, the only way to lose money on a CD is to withdraw it before the end of the CD’s term.

Certificates of Deposit Pay Higher Interest

At the time of this writing, Bank of Dudley’s highest-yield savings or money market accounts yield between .45% and .75% for most customers, who have less than $100,000 in savings. Higher yields are available, but only for customers with larger balances.

At that same time, a minimum deposit of $1,000 can earn between 2.5% and 4% with a certificate of deposit. That’s an increase of about five times over what a savings or money market account will yield, even at lower balance amounts.

Certificates of Deposit Are Flexible

Don’t take the withdrawal penalty as evidence that CDs aren’t flexible. While you can’t touch your money while the account is immature, you have plenty of options while you’re setting up your CD and then have total flexibility with what to do with the money once the account matures.

At opening, you can choose the amount of your deposit, and there will usually be several term options. The amount of interest you earn will be dependent on the length of your CD’s term.

When your account matures, you can choose to withdraw the full amount of your principal plus the interest you’ve earned. You can also choose to “roll over” the account and put the full amount of your existing CD into another CD to continue growing interest.

Another strategy is called “laddering,” and it allows you to invest at the higher yield rate of longer-term CDs without having 100% of your investment tied up 100% of the time. Laddering means setting up a structured system of buying long-term CDs at short intervals. For example, a three-year CD ladder would look like this:

• The investor opens a 1 year, a 2 year, and a 3 year CD
• When the 1 year CD matures, that money is rolled into a new 3-year CD
• When the 2-year CD matures, that money is also rolled into a new 3-year CD

The investor now has all of their investment in high-yield, 3-year CDs, but one CD matures each year, allowing the investor more consistent access to their money. Continuing to roll funds into new 3-year CDs (unless the money is needed or expected to be needed at one’s point of maturity) ensures a steady growth in the invested value.

FDIC-Insured, Customer Focused, and 100% Local: Bank of Dudley

Since 1905, the team at Bank of Dudley has remained dedicated to helping our neighbors find financial success. Our local bankers are always ready to help you navigate the complex world of personal and business banking, and we’re 100% committed to helping you find the products and services that work for you – and helping you meet your financial goals.

Call today and discover true relationship banking: 478-277-1500