When I think CDs, I think of my now useless music collection that I chuck like ninja stars at my friends because they  are good for absolutely nothing (the CDs, not my friends) but taking up space on my dresser (maybe my really small friends). CDs apply to banking too, just not the music kind. CDs stand for certificates of deposit (CD).

So…is this some kind of prize? Is there cash involved? What is this certificate that you speak of?  Downside? No prize. You’ll have to stick with those elementary school trophies for participation…or the Nobel Prize, whichever category you fall into. The upside? Heck yeah, there’s cash involved!

How It Works

A certificate of deposit can be obtained if you take a certain amount of money, give it to a bank or sometimes a brokerage, and promise not to take your money out for a certain amount of time (seven days to ten years). They give you interest for keeping your money for that amount of time.

When your CD’s time of is up, little jailbird, you can roll the money over to another CD, or you can just cash in. So, if you have some money that’s not needed for a while, a CD could be the place to be. Some money for doing practically nothing? Sweet!

But more importantly, how do you get paid? Banks normally tack the interest onto your account at the end of the term, but with a long-term CD, you can get the interest paid to you on a regular basis like every month or quarter.

The Pros, Bros?

• The interest rates will make you giddy. For keeping your money in for a certain amount of time, you generally get a higher interest rate with CDs than savings, checking or money market accounts. YAHTZEE! The general rule of thumb is that that the longer you promise to keep it in there, the higher your interest rate is.
• Safety feels so good. Even better, it’s also FDIC or NCUA insured. Joy! That means that if your bank gets sucked down the giant toilet of failure, you are untouched, money safe.
• Time is as flexible as a yoga instructor. With CDs, you can get them for any length of time, so you don’t have to necessarily invest it for years upon years. You could even get a CD for just seven days. Just because you might need the money a year from now doesn’t mean you have to tie it up for that long.

The Cons, Mon?

• Minimums suck. CDs have high minimums. Sorry, chief. The good news? There are some CDs that have lower minimums, meant for students, young adults, and everyone else that can’t afford the high minimums. Bad news? All the rest of them usually have a minimum of at least $500.
• If you cash your CD in early, there’s a fee avalanche. Of course, you don’t think you’ll take it out early, but then suddenly, that extremely sweet ol’ lady on the bus has nabbed your wallet and maxed out your credit cards. Tricky ol’ ladies. If you cash in within six days of getting any CD, federal law requires that you pay a minimum of seven days interest, but this law does not limit the number of fees that the banks can hit you with as long as they tell you before you deposit your money in your CD. They can make you pay them the interest you would have made if you had just left your money in the CD. When you have a CD, the bank is counting on investing that money for a certain amount of time. If you take the money out early, in theory the bank has to pull some of their assets out early to pay you back. Even though it’s your money, you messed with their money a bit, sooooo…they wanna get paid. In general, the sooner you withdraw, the more money you will lose, either from your interest or original payment.

EXAMPLE!

Confused? Say you have a CD that matures after a year. You don’t have enough money to buy some Tooty Fruity cereal every morning, and life just isn’t worth existing without it. So, you decide to pull the money you put into the CD after four months. I mean, it’s fruitylicious. They might charge you for eight months interest, so the interest you made plus some interest you didn’t even get to make yet.