How does a certificate of deposit (cd) work?
It is called a Timed Deposit. With a regular savings account, the bank has to be ready to give you your money back at any time that you show up at the window. That is not ideal for them. If you agree to let them keep your money for 1 year, they can loan it out for a longer time and get a higher return. That is a Certificate of Deposit. Usually you must meet a minimum. You can usually not keep adding money to it. You can only touch it by paying a penalty. It is not better or worse than a savings account; unless you know that you absolutely won’t need to touch the money..
CD terms can vary significantly from bank to bank and the terms will vary depending on what interest rate you want. A $1000 CD will not earn Jumbo rates, but it is still a better return than a normal savings account. Banks pay more for CDs because no, you cannot just pull the money out without incurring a penalty. And no, you do not continue to deposit money into it. You can a CD in almost any increment – the larger the dollar amount and the longer the term, the more you will earn. Check with a lot of different banks because the rates can very significantly depending on how much money that particular bank needs to raise (and for how long).
