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How does a CD work?

CDs are currently offering significantly higher interest rates than traditional savings accounts. Getty Images

With inflation still present and stock market returns unpredictable, many Americans find themselves looking for reliable ways to protect and grow their money. 

While interest rate hikes courtesy of the Federal Reserve have hurt homebuyers and those looking to refinance, the action has helped grow the appeal of high-yield savings and certificates of deposit (CD) accounts. Both types will secure account holders' money while offering favorable interest rates to grow it over time.

For those looking for a CD, it first helps to understand how this sort of account operates (and what kind of interest one can potentially earn). You can check today's CD interest rates here now or use the table below to explore some local options.

How does a CD work?

CDs are easy to operate and understand. You can either open a new account from scratch or withdraw funds from an existing account and move them into a CD instead. CD terms vary from three months to six months to potentially years. You won't be able to take the money out before the term ends (unless you're willing to pay a withdrawal penalty). 

CDs offer protection against the steady withdrawals a regular savings account may endure and the whims of the market. The Annual Percentage Yield (APY) you get on a CD will remain the same until it matures, regardless of any market activity during that time. Usually, the longer your CD term the more interest you'll earn, although that's not always the case in today's unpredictable market. 

Once the CD expires you'll have a few options. You can renew it (at the rate available at the time), withdraw it (and the interest earned) altogether, or simply put that money into a different account (maybe into a regular savings or high-yield savings account). Just have a plan in place before that expiration date appears on the calendar because if you don't take any action the CD may automatically renew after a certain period of time (think 10 days or so).

If this sounds advantageous for your personal financial situation then start exploring your CD options online today.

How much interest do CDs earn?

Now is a good time to open a CD. CD interest rates are anywhere between 3% to 5% depending on the lender and the term you choose. Compare that to the 0.33% that accompanies most current traditional savings accounts and you quickly realize that you're leaving money on the table by not opening a CD.

How much money are you losing? Using a $5,000 deposit for reference, a regular savings account would earn $16.50 in a year (at the 0.33% interest rate). A CD at 4.5% would earn $225 over that same time period. Just note that if you earn $10 or more on this sort of account there will be tax reporting items to deal with when it comes time to file your return, so make sure you have all of your CD paperwork before filing. 

Use the table below to easily find a CD with a high-interest rate.

The bottom line

In an economic climate plagued by inflation and market unpredictability, CD accounts offer a safe and reliable way to protect your money and grow it at a favorable interest rate. CDs come with different lengths and different rates, though they're currently significantly higher than those you would obtain with a regular savings account. You can open a CD with many lenders at their physical locations or you can easily open one today online. Explore your options now and start earning more money!

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