In addition to basic savings accounts and money market accounts, you can also put money into certificates of deposit, or CDs. Like savings accounts, if you put your money in a CD, it will earn interest -- sometimes at a much higher rate than a regular savings account.

You might be wondering, "Then what's the difference between a CD and a savings account?" The difference (besides the interest rate) between a savings account and money put into a CD is that the money in the CD has to stay put for a specified amount of time -- unless you are willing to pay a penalty. This means you have to make sure it is money you can live without and that the higher interest rate is worth it! For instance, you don't want to have to borrow money when you have money in a CD, because it's possible you'll be paying more interest on the loan than you're actually earning on the CD.

CD's have a maturity date -- the date when you can withdraw your money without having to pay a penalty. If you need to cash out your CD before it matures, most banks charge an early-withdrawal fee (or penalty). These fees are usually equal to about three to six month's of interest. CDs typically mature in three months to five years, although 10- and 20-year CDs are not unheard of, either. Banks generally offer various options regarding the length of time you can place your money in a CD.

CDs are protected by the Federal Deposit Insurance Corporation (FDIC) if they are issued through a bank. This means that your money is safe even if the bank goes out of business -- although that isn't very likely to happen. Interest rates and FDIC issues aside, your money is still safer in the bank than at your house just because you'll be less likely to spend it, and it will be in a fireproof and well-protected safe.

Interest earned
Like savings accounts, most CDs offer compounded interest, which means the interest your money earns is added to the total amount of the CD so that the next time interest is added, you earn even more. So, the bank is paying you interest on the money they've paid you in interest. That's pretty cool!

If you're wondering when to -- or even whether you should -- choose a CD instead of a savings account, consider these points. A CD is good idea when:

  • You have money you won't need for a while
  • You can get a better interest rate than with other types of savings
  • You don't want the risk of other types of investments

For more certificate of deposit information and links to related topics, check out the next page.