Certificates of deposit (CDs): How they work to grow your money

August 16, 2022

Learn how this savings tool works, when to consider it and your options.

You probably already have a checking or savings account from which you pay monthly bills and cover daily expenses. You might even have a retirement savings account like a 401k or IRA. If you also have some extra money that you won’t need right away, consider growing it with a certificate of deposit (CD). A CD may give you a higher return than a traditional savings account, while still allowing you to withdraw your money after a set period of time that you select when you open the account.

Learn more about growing your money with a CD from U.S. Bank.



 

Maturity: Your CD reaches maturity at the end of the term you chose when you opened the account. Then, either you can withdraw the money, or you can reinvest in another CD. If you do nothing, a bank typically will automatically reinvest your money in another CD with the same term. If you want to withdraw your money or move it into a CD with a longer or shorter term, you’ll need to let the bank know during the grace period of the CD. This is a period of time after the CD matures during which you can make changes to your account with no penalty. Then, you can transfer your deposit to your checking or savings account, or you can purchase another CD with a different term.

Early withdrawal: If you withdraw money before the CD’s term ends, you’ll usually have to pay a penalty. This penalty varies, but you may have to give up some of your interest earnings.

Laddering: Many savers may try to take advantage of the higher interest rates CDs tend to offer while also attempting to keep their savings semi liquid. They often do this by purchasing more than one CD. For example, you might deposit money in a one-year, two-year, three-year, four-year and five-year CD — a strategy known as laddering. With this approach, one CD would mature each year, and you would be able to access the original funds and earned interest without paying a penalty. This also may be a valuable approach if interest rates rise more generally throughout the economy. When interest rates increase broadly, you are likely to earn a higher interest rate on a new CD account.

 

When should you consider a CD?

CDs may be a good choice if you have budgeted well and have some money in savings that you’re unlikely to need right away. Consider other CD pros:

  • Low-risk investment: CDs from banks are generally FDIC insured, that is insured by the Federal Deposit Insurance Corporation. If your bank participates, your CD deposit generally is protected up to $250,000, making CDs a safer investment than stocks, which are not insured against loss of principal. 
  • Savings motivation: When you open a CD account, the penalty for withdrawing your deposit before the term ends can be a strong incentive not to spend money you planned to save. If you want to add extra protection to your savings goals, a CD may be a good option. While CD accounts are less common than checking or savings accounts, households with CDs tend to hold a lot more money in them than they do in checking or savings, according to the Federal Reserve.

 

When is a CD not right for you?

If you are uncertain about your spending plans for the next few months or years, or if you will need to take money out of savings soon for a major purchase, a CD may not be the best choice. The penalty for early withdrawal removes some flexibility and value.

Additionally, they are not a good substitute for a broader strategy to invest for retirement, because they generally earn lower interest rates relative to other options, such as purchasing stocks, bonds or mutual funds. That means it can be harder to use CDs to accumulate the funds you will need for retirement.


 

What types of CDs are available?

Traditional CDs: These CD accounts are the most common and have fixed interest rates and terms. This means the interest rate and length of time you will keep your deposit in the account are set when you make the initial deposit, and they won’t change until the CD matures. Traditional CDs also require you to pay a penalty if you withdraw your money before the account matures. But there are other types of CDs with different terms that could be a good fit for your savings plans.

Trade-up CD: This type of CD offers a lower interest rate at the beginning of its term than a traditional CD does. However, it also gives you an opportunity to earn more. If interest rates rise on CDs with similar terms before your CD matures, you can choose to raise the interest rate of your account at least once during the term. If rates don’t rise, however, you could miss out on the higher interest rates offered by traditional CDs. A trade-up CD could be a good choice if you expect interest rates to increase soon.

Step-up CD: Like most CDs, a step-up CD has a set interest rate at the beginning of its term. A step-up CD also typically starts with a lower interest rate than a traditional CD with a similar term. But unlike other CDs, the rate on a step-up CD rises at specific stages over the life of the CD. For example, in a 28-month CD, the interest rate might rise after seven, 14 and 21 months. A step-up CD may be a useful option if you expect interest rates to rise, but you are concerned about having to choose the best time to increase the rate, as you would with a trade-up CD.

No-penalty CD: Suppose that you are interested in purchasing a CD, but you’re unsure about whether you may need the money before the CD term ends. A no-penalty CD, as its name suggests, does not require you to pay a penalty if you withdraw your money before the account matures. The tradeoff is that this type of CD generally offers a lower interest rate than that of a traditional CD, which do have a penalty for early withdrawal.

CDs can be part of a sound financial plan. To learn which kinds of CDs might be best for you, speak with your banker or accountant.

 

Ready to save? Start by comparing potential rates for U.S. Bank CDs today.

 

 

The customer would need to do this within what is called “grace period”; in which per regulations bank’s must notify a customer a specific amount of days ahead of time before the maturity date, so that once the account matures the customer is aware that they have a grace period (typically 10 days) to decide what to do (withdraw money without a penalty, renew CD or purchase a new CD).

Related content

Stay committed to your goals by creating positive habits

How to save money while helping the environment

Bank Notes: College cost comparison

Certificates of deposit: How they work to grow your money

Checking and savings smarts: Make your accounts work harder for you

Saving for a down payment: Where should I keep my money?

Your 5-step guide to financial planning

5 tips for creating (and sticking to) a holiday budget

Key components of a financial plan

Don’t underestimate the importance of balancing your checking account

Multiple accounts can make it easier to follow a monthly budget

Preparing for retirement: 8 steps to take

How to talk about money with your family

Retirement income planning: 4 steps to take

Good money habits: 6 common money mistakes to avoid

Is a Health Savings Account missing from your retirement plan?

How grandparents can contribute to college funds instead of buying gifts

Saving vs. investing: What's the difference?

How does money influence your planning?

Loud budgeting explained: Amplify your money talk

Do your investments match your financial goals?

Retirement savings by age

Preparing for retirement: 8 steps to take

Lost job finance tips: What to do when you lose your job

Transitioning from the military to the civilian workforce

Trabajar con otra persona que te ayude a asumir responsabilidades puede facilitarte alcanzar tus metas

What to do with your tax refund or bonus

Tres herramientas financieras para ayudarte a automatizar tus finanzas

How I did it: Bought a home without a 20 percent down payment

How to increase your savings

How to gain financial independence from your parents

How to Adult: 5 ways to track your spending

Checklist: 10 questions to ask your home inspector

Closing on a house checklist for buyers

How compound interest works

How to track expenses

How to build wealth at any age

5 tips for parents opening a bank account for kids

Investment strategies by age

5 financial goals for the new year

How to get started creating your business plan

How to financially prepare for pet costs

Checklist: financial recovery after a natural disaster

3 steps to prepare for a medical emergency

Family planning for the LGBTQ+ community

Preparing for adoption and IVF

11 essential things to do before baby comes

Webinar: Uncover the cost: Starting a family

3 tips for saving money when moving to a new home

5 ways to maximize your garage sale profits 

Pros and cons of a personal line credit

Tips for handling rising costs from an Operation HOPE Financial Wellbeing coach

Tips to earn that A+ in back-to-school savings

Mindset Matters: How to practice mindful spending

Uncover the cost: International trip

Uncover the cost: Wedding

Using 529 plans for K-12 tuition

How to manage your finances when you're self-employed

Does your side business need a separate bank account?

How to choose the right business savings account

Make your business legit

Talent acquisition 101: Building a small business dream team

5 things to know before accepting a first job offer

7 steps to prepare for the high cost of child care

How to decide when to shop local and when to shop online

Ahorra para momentos difíciles: 5 mitos acerca de los fondos de emergencia

How to save for a wedding

How I did it: Turned my side hustle into a full-time job

Stay on budget — and on the go — with a mobile banking app

5 things to consider when deciding to take an unplanned trip

How to talk to your lender about debt

How to test new business ideas

How can I help my student manage money?

Bank from home with these digital features

How I did it: Switched career paths by taking an unexpected pivot

Year-end financial checklist

Achieving their dreams through a pre-apprenticeship construction program

Credit: Do you understand it?

How to manage money in the military: A veteran weighs in

Are professional movers worth the cost?

Beyond the mortgage: Other costs for homeowners

Spring cleaning checklist for your home: 5 budget-boosting tasks

Home buying myths: Realities of owning a home

Travel for less: Smart (not cheap) ways to spend less on your next trip

Should you buy now, pay later?

U.S. Bank asks: Do you know what an overdraft is?

Tips for working in the gig economy

Which is better: Combining bank accounts before marriage — or after?

Tips to overcome three common savings hurdles

Money Moments: 8 dos and don’ts for saving money in your 30s

Save time and money with automatic bill pay

Helpful tips for safe and smart charitable giving

Growing your savings by going on a ‘money hunt’

Why a mobile banking app is a ‘must have’ for your next vacation

Tips to raise financially healthy kids at every age

How I kicked my online shopping habit and got my spending under control

Friction: How it can help achieve money goals

It's possible: 7 tips for breaking the spending cycle

Financial checklist: Preparing for military deployment

A continuación te explicamos cómo crear tu propio presupuesto

Webinar: Common budget mistakes (and how to avoid them)

Are savings bonds still a thing?

Allowance basics for parents and kids

9 simple ways to save

Do you and your fiancé have compatible financial goals?

3 ways to keep costs down at the grocery store (and make meal planning fun)

What military service taught me about money management

College budgeting: When to save and splurge

How I did it: Paid off student loans

The A to Z’s of college loan terms

How to save money in college: easy ways to spend less

Costs to consider when starting a business

Adulting 101: How to make a budget plan

You can take these 18 budgeting tips straight to the bank

How I did it: Learned to budget as a single mom

Personal loans first-timer's guide: 7 questions to ask

Consolidating debts: Pros and cons to keep in mind

Improving your credit score: Truth and myths revealed

Dear Money Mentor: How do I set and track financial goals?

What I learned from my mom about money

6 ways to spring clean your finances and save money year-round

How to cut mindless spending: real tips from real people

What financial advice would you give your younger self?

How to stop living paycheck to paycheck post-pay increase

Practical money tips we've learned from our dads

What you need to know about renting

What’s in your emergency fund?

Dear Money Mentor: How do I pick a savings or checking account?

How I did it: Deciding whether to buy an RV

Practical money skills and financial tips for college students

Money management guide to financial independence

Personal finance for teens can empower your child

5 reasons why couples may have separate bank accounts

U.S. Bank asks: Transitioning out of college life? What’s next?

Co-signing 101: Applying for a loan with co-borrower

How to use debt to build wealth

How having savings gives you peace of mind

How to build credit as a student

Reto de 30 días para adultos: Tareas de bienestar financiero para completar en un mes

Money Moments: Tips for selling your home

How I did it: My house remodel

First-timer’s guide to savings account alternatives

Does your savings plan match your lifestyle?

3 tips for saving money easily

Myths vs. facts about savings account interest rates

Military homeownership: Your guide to resources, financing and more

U.S. Bank asks: Do you know your finances?

Healthcare costs in retirement: Are you prepared?

Parent checklist: Preparing for college

U.S. Bank asks: What do you know about credit?

7 financial questions to consider when changing jobs

Webinar: 5 myths about emergency funds

How to best handle unexpected expenses

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.