Certificates of Deposit (CDs) are time deposits with a specified interest rate and maturity date held at a bank. If redeemed prior to maturity, a penalty may be imposed. CDs are generally insured by the FDIC within certain limits.
You will usually be paid more interest the longer the term of the CD. CDs often times pay a higher rate of interest than a savings account or money market account.
CDs might be most appropriate for people who don’t need their money currently and who are willing to loan it to a bank in exchange for a higher interest rate.
One common CD strategy (also commonly used with bonds) is to ladder or stagger your CDs. For example, let’s assume I had $3,000 to invest in CDs. A 3 year CD will likely pay higher interest than a 1 or 2 year CD, but let’s assume I don’t want to lock up all of my money for that long. If I were to ladder my CDs, I might invest $1,000 in a 1 year CD, $1,000 in a 2 year CD, and $1,000 in a 3 year CD. Each year, I take the proceeds from the expired CD and reinvest it in a 3 year CD. That way I continue to receive money each year (in case I ever need any of it), but my money is consistently invested at the higher 3 year rate rather than the lower 1 year rate.